PREPARING THE HEALTH CARE FINANCING

ADMINISTRATION FOR THE 21ST CENTURY

HEARING
BEFORE THE

SUBCOMMITTEE ON HEALTH
OF THE

COMMITTEE ON WAYS AND MEANS

HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION

JANUARY 29, 1998

Serial No. 10586

Printed for the use of the Committee on Ways and Means

U.S. GOVERNMENT PRINTING OFFICE

60839 WASHINGTON : 1999
 COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, JR., Connecticut ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM MCDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. MCNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. SINGLETON, Chief of Staff
JANICE MAYS, Minority Chief Counsel

SUBCOMMITTEE ON HEALTH
BILL THOMAS, California, Chairman
NANCY L. JOHNSON, Connecticut FORTNEY PETE STARK, California
JOHN MCCRERY, Louisiana BENJAMIN L. CARDIN, Maryland
JOHN ENSIGN, Nevada GERALD L. KLECZKA, Wisconsin
JON CHRISTENSEN, Nebraska JOHN LEWIS, Georgia
PHILIP M. CRANE, Illinois XAVIER BECERRA, California
AMO HOUGHTON, New York
SAM JOHNSON, Texas

Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public hearing records
of the Committee on Ways and Means are also published in electronic form. The printed
hearing record remains the official version. Because electronic submissions are used to
prepare both printed and electronic versions of the hearing record, the process of converting
between various electronic formats may introduce unintentional errors or omissions. Such occur-
rences are inherent in the current publication process and should diminish as the process
is further refined.

(II)
 CONTENTS

Page
Advisory of January 21, 1998, announcing the hearing ....................................... 2

WITNESSES
Health Care Financing Administration, Hon. Nancy-Ann Min DeParle, Ad-
ministrator ............................................................................................................ 7
U.S. General Accounting Office, William J. Scanlon, Ph.D., Director, Health
Financing and Systems Issues, Health, Education, and Human Services
Division; accompanied by Leslie Aronovitz, Associate Director, Health Fi-
nancing and Systems ........................................................................................... 41

Bulter, Stuart, Heritage Foundation ...................................................................... 64

Center for Studying Health System Change, Paul B. Ginsburg .......................... 77
National Academy of Sciences, Institute of Medicine, Marion Ein Lewin .......... 87
National Academy of Social Insurance:
Paul B. Ginsburg .............................................................................................. 77
Michael E. Gluck .............................................................................................. 77

SUBMISSIONS FOR THE RECORD

Home Care Association of America, Jacksonville, FL, Dwight S. Cenac, state-
ment ...................................................................................................................... 121
National Association of Health Underwriters, Thomas P. Bruderle, statement 131
Oklahoma Association for Home Care, Karen Rogers, statement ....................... 135
Retired Public Employees Association, Inc., Albany, NY, statement .................. 140

(III)
 PREPARING THE HEALTH CARE FINANCING
ADMINISTRATION FOR THE 21ST CENTURY

THURSDAY, JANUARY 29, 1998

HOUSE OF REPRESENTATIVES,
COMMITTEE ON WAYS AND MEANS,
SUBCOMMITTEE ON HEALTH,
Washington, DC.
The Subcommittee met, pursuant to notice, at 10:08 a.m., in
room 1100, Longworth House Office Building, Hon. William Thom-
as (Chairman of the Subcommittee) presiding.
[The advisory announcing the hearing follows:]

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Chairman THOMAS. If the Subcommittee would come to order

Id like to welcome our guests and witnesses to todays Health Sub-
committee hearing with a rather broad title: Preparing the Health
Care Financing Administration for the 21st Century. And I do
want to welcome the Health Care Financing Administrations new
Administrator, Nancy-Ann Min DeParle, who is going to take quite
a large role in setting the tone for the underlying theme of the
hearing.
In the past few months, the Health Care Financing Administra-
tion has undergone three significant changes. Obviously, a new Ad-
ministrator. Secondly, the agency recently underwent a comprehen-
sive reorganization affecting virtually every one of the more than
4,000 employees. And third, pretty obviously, the Congress passed
and the President signed the Balanced Budget Act of 1997 which
contains the most comprehensive Medicare reform since the incep-
tion of the program.
These reforms have, and will have, a dramatic impact on the
Medicare program. Our seniors will be able to choose from a vast
array of privately run, Medicare-plus-choice plans like Medicare
savings accounts, provided-sponsor organization plans, health
maintenance organizations, private fee-for-service plans, while
maintaining the option of remaining in traditional fee-for-service
Medicare.
The latest Congressional Budget Office estimates predict that
many of our seniors will choose to leave fee-for-service Medicare
and enroll in a privately-run plan. In just four years, one-quarter
of beneficiaries are expected to choose to enroll in a private plan,
and by 2030, its projected that perhaps half of all beneficiaries will
make a similar choice.
As a result of the Balanced Budget Act, there will also be signifi-
cant payment changes, as many of us have heard about, to mod-
ernize the fee-for-service part of the program; shifting from a 1960-
style cost-based reimbursement to prospective payment systems.
There will also be several new preventive benefits, like the diabetes
self-management, prostate screenings, and others, that need to be
implemented.
Finally, the agency must ensure that taxpayer dollars are spent
wisely by implementing some of the historic steps Congress has
taken in the past two years. For example, the Health Insurance
Portability and Accountability Actand the fraud and abuse sec-
tions of that actand the Balanced Budget Act combined offer
about 65 concrete steps to fight waste, fraud, and abuse in Medi-
care and the American health care system.
Clearly, Ms. DeParle, you have your work cut out for you. In the
short-run, you have to implement these new provisions. However,
you also have to continue those structural changes to the manage-
ment of the Health Care Financing Administration, some of which
we are only now beginning to appreciate the depth and breadth of
in operating a private-plan-focused environment in the 21st cen-
tury.
I am concerned that an agency that historically focused on regu-
lation and micro-management and paying the bills may have some
difficulty without a lot of open understanding and positive critiques
in transforming itself into one that protects seniors and fosters in-
 5

novations among private plans. It is not easy for bureaucracies to

make these kinds of fundamental shifts which go at the core of the
culture of a particular bureaucracy.
This is the issue that we will begin to explore today with Mrs.
DeParle, Mr. Scanlan from the General Accounting Office, and our
panel of experts who will help us understand the changes that are
needed to prepare the Health Care Financing Administration for
the 21st century. And before we recognize the new Administrator,
Id ask my colleague from California, Mr. Stark, if he has any re-
marks.
Mr. STARK. Thank you, Mr. Chairman, I do have remarks. Im
not sure which you want firstgood news or bad news. But I ap-
preciate, on the good news side, I appreciate your holding this over-
sight hearing on HCFAs ability to administer the Medicare pro-
gram and implement the changes required in the Balanced Budget
Act. The bad news is that HCFAs administrative budget is inad-
equate to do any of the things that many of us might want. I hope
we can work on a bipartisan basis to urge our colleagues who are
the appropriators to give the agency the resources it needs. Were
all aware that the best way to end an agency in this town, is to
starve it for funds. If we really dont want HCFA to do anything,
then we ought to just let the appropriators not give it the money.
If we really want to get them to a program that we can agree on,
weve got to see that they get adequate funds. Well talk about that
in a little bit.
But basically, the money HCFA gets to review claims, or the pen-
nies per claim, is now 43 percent lower than it was in 1989. And
I dont care how you slice that, when you cut the per-claim dollars
darn near in half, the agency cant keep up. Weve also added the
fight for fraud which gets more sophisticated all the time. Still,
with an ever declining budget, their volume of work goes up. Now,
HCFA must get some volume discounts, but I think we have a re-
sponsibility to see that they get the funds to do whatever it is that
this committee charges them to door this Congress does.
The administration is proposing a package of antifraud legisla-
tion, and I hope well enact it. Included in it is an idea that Id like
to advocate and thats doubling the number of audits for cost-based
providers and paying for it with a fee to cover those costs. Many
of those providersColumbia and its private accounting firm,
KPMG in Floridahave proven that theres more than just smoke
there. Audits there would have saved us a lot of money.
Part of the cost of doing business with Medicare must include the
cost of an independent audit. By charging a fee, well be able to
provide some of the resources it takes to protect the Medicare trust
funds.
Explaining the new Medicare choice programs to seniors will be
a daunting task for HCFA or anybody else. If they dont have the
money to explain it, they cant do it. We authorized $200 million
this year, but the appropriators only gave them $95 million. This
fall, HCFA is likely to be flooded with calls from confused bene-
ficiaries about the new array of plans and the wave of advertising
that will come out. We all know thats going to happen.
Our staff this week just placed calls to HCFAs 800 number, and
the results were troublesome. There were lengthy delays, and that
 6

was the rule not the exception. And as any of you who have tried
to get past 800 numbers to check your credit card know, Im not
sure whether money will solve all those problems. But I do know
that these plans will be complex they will be confusing. Our own
offices will hear from beneficiaries and we ought to do whatever we
can: one, to encourage HCFA to see that the phones are answered
promptly and there are people who can give you good information,
and secondly, that we see that they get the resources to be able to
do it.
Finally, you asked, Mr. Chairman, whether HCFAs reorganiza-
tion produced a structure that is appropriate for the 21st century;
and Im afraid it isnt. Weve got a situation like weve hadand
criticized oftenwithin the FAA. HCFA is in the business, or will
be in the business, of promoting managed care at the same time
it is trying to regulate it. And those are conflicting roles. You cant
order people to promote something on the one hand, and then on
the other hand come back and say youve got to investigate them
and tell people when they arent working correctly. I think we have
to look at that issue and look for independent patients counsel, or
separating, if not explicit, implicit promotion of managed care and
its regulation.
While the Cshairman may not like the ideas for regulations that
are currently being circulated, we do need them. Weve got to stop
the cheers in the movie As Good As It Gets and somehow make
the public convinced that they do have somebody on their side. And
I hope our Subcommittee will look at that important issue.
Thank you for starting out the year with this hearing and I look
forward to hearing from our witnesses.
Chairman THOMAS. I thank the gentleman.
This is a new year and a second session and I believe the spirit
in which the gentleman made his comments is a constructive one
and I did not go into any detail in my opening remarks rather than
to just set the frame. I think youll find, and now I guess Ill
prompt our first witness, that our intention was to make sure that
there was adequate funding for the administrative changes. We
have tried to work in a cooperative way to make sure that if nec-
essary the movement of money within the structure, and indeed
additional money, could be made available. I had no intention
whatsoever of creating new ways to deliver services and then not
make sure they werent adequately financed to do that. You and I
could share some time discussing the appropriators and the way in
which all of us have concerns about the appropriators.
Beyond the gentlemans concern for an organization thats not
only going to regulate managed care but also supervise and run it,
the same might be true for fee-for-service, and in fact they have al-
most a monopoly on that. We will have panelists who have looked
at this problem and who have the same concern from adjustment
within the culture of HCFA to eliminating HCFA. And I just think
its appropriate at this stage, maybe, to remember that the Presi-
dent has played a relatively significant role in getting us to refocus
on the question of health care delivery in Medicare and in putting
people first.
On page 21, the President said as part of his vision, if he were
to be elected president, quote, We will scrap the Health Care Fi-
 7

nancing Administration and replace it with the Health Standards

Board made up of consumers, providers, business, labor, and gov-
ernment that will establish annual health budget targets and out-
line a core benefits package. He didnt use the phrase, whither
away; he used the phrase, scrap. But what were trying to do is
make sure that these bold visions, although the end product might
be something that we would agree with, the hastiness of a phrase
like scrap clearly would not serve the beneficiaries.
What we need is planned change. And Mrs. DeParle is now in
charge of an immense bureaucracy that has major responsibilities,
frankly, significant economic impact if things arent done correctly
for the economy, and shes anxious to tell us about what shes al-
ready done as a new administrator and what she plans to do.
So, if my colleagues have any statement, wed be willing to put
a written statement in the record, but Id like to turn now to the
new director of the Health Care Financing Administration, Mrs.
DeParle. The time is yours. Your written statement will be made
a part of the record as always, and you can address us in any way
you see fit.
STATEMENT OF NANCY-ANN MIN DE PARLE, DIRECTOR,
HEALTH CARE FINANCING ADMINISTRATION
Ms. DEPARLE. Thank you, Mr. Chairman.
Mr. Chairman, Mr. Stark, and Members of the Subcommittee,
Im very pleased to have this opportunity to discuss with you my
priorities as Administrator of the Health Care Financing Adminis-
tration and their relationship to your theme today in preparing
HCFA for the 21st century. Before getting into my priorities, I
want to begin by describing what HCFAs recent reorganization is
all about and how its helping us meet our goals.
When HCFA was created in 1977, running the Medicare program
primarily meant paying bills on time. After 20 years of significant
changes in the health care environment, it is time to address
whether the agency was organized in the best way to fulfill its re-
sponsibilities.
Chairman THOMAS. Nancy-Ann.
Can you hear in the back? You need to turn that mic directly to-
wards you and speak directly into it very closely. For some reason,
the sound system, although we didnt have the best before, has got-
ten worse and its no fun sitting there not hearing because what
you have to say is important. You are going to have to talk directly
into it and get relatively close. Im sorry, go ahead.
Ms. DEPARLE. Thank you.
After 20 years of significant changes, we felt it was time to ad-
dress whether we were organized in the best way to fulfill our re-
sponsibility. So, in 1996, the agency began a process that included
consultation with a broad spectrum of individuals and groups with
whom we interact: beneficiaries, the States, and health plans and
providers. These are our three core markets.
We looked at private sector health plans and insurance compa-
nies. And the primary focus of the reorganization which was imple-
mented last July was to structure the agency in such a way that
these three core markets are at the center of what we do and that
they have a one-stop shopping to address their needs.
 8

The processes involved in reorganizing are difficult, as you all

know. Even positive change can be traumatic. But we consider
them to be growing pains; and I consider the reorganization to be
something that was long overdue.
Our ultimate goal is to ensure that changes to the agency are im-
plemented in a manner that makes Medicare and Medicaid strong-
er and more efficient, not only for todays beneficiaries, but for fu-
ture generations.
My priorities as the Administrator of HCFA are simple to state
but much harder to accomplish. I think they are very much con-
sistent, Mr. Chairman, with your theme today, Preparing HCFA
for the 21st Century. They are: first, to reform and strengthen
Medicare and Medicaid starting with implementing the Balanced
Budget Act which expands choices for beneficiaries and guarantees
Medicares solvency until 2010; second, to implement the new Chil-
drens Health Insurance Program; third, to sharpen our focus
against fraud and abuse; and, fourth, to ensure that HCFAs infor-
mation systems are ready for the millennium.
Since the Childrens Health Insurance Program and Medicaid are
not within the oversight of this subcommittee, Im going to focus
on the other priorities.
My first priority is to ensure that we implement the Medicare re-
forms in the Balanced Budget Act, and not just that we implement
them, but that we do it right. As you well know, Mr. Chairman,
there were about 300 separate provisions that must be carried out
to fully implement this law. Some of the provisions are simple, but
some of them are extraordinarily complex. Our staff is working
tirelessly to meet the deadlines, and they are working with your
staff here very well. Were doing everything we can to get the job
done with the resources we have, but as both you and Mr. Stark
have acknowledged, the fact remains that our resources have di-
minished in real terms while our responsibilities have grown.
Let me put this in perspective. Between 1993 and 1997 Medi-
cares administrative spending in real dollars decreased by around
11 percent while the number of claims that we processed has gone
up by about 25 percent. The number of managed care plans with
Medicare contracts has more than doubled and the number of
skilled nursing facilities and home health agencies has increased
by over 30 percent.
Despite the new responsibilities that we received in the Balanced
Budget Act and the Health Insurance Portability and Accessibility
Act, our program management budget for this fiscal year increased
only one-half of 1 percent. Many of our new responsibilities will re-
quire additional work in Fiscal Year 1999 and subsequent years.
And I do want to say that I thank the members of this sub-
committee for their help with the 1998 budget, because, as the
chairman noted, you and your staffs were helpful in trying to work
with the appropriations committees and express to them the impor-
tance of the work that were doing.
When the administrations budget is released next week, I hope
well be able again to work together to ensure that we have ade-
quate resources to do the good job of running these programs that
you want us to do.
 9

Im committed to a smooth implementation of the Balanced

Budget Act. I want to continue to work closely with this sub-
committee and its staff.
Mr. Chairman, I am committed to stepping up the crackdown on
fraud and abuse begun by the President in 1993. Since Ive been
at HCFA, we have taken several new steps to combat fraud and
abuse. Just last week, we published a proposed regulation to tight-
en standards and strengthen enforcement against unscrupulous du-
rable medical equipment suppliers. We are requiring on-site inspec-
tions before these new suppliers are approved. And also this
month, we set tougher requirements for home health agencies and
lifted a moratorium that we imposed last September on new agen-
cies entering Medicare.
Beginning next month, the Inspector Generals toll-free num-
ber1800HHSTIPSwill appear on every statement that we
send to Medicare beneficiaries, so that they will know where to call
to report Medicare fraud. And later this spring, we will host a Na-
tional conference to bring together our colleagues in the Federal
Government and the private sector as part of a process to develop
a comprehensive anti-fraud and abuse plan.
Weve made some good progress, but, as you know, the nature of
health care fraud demands that we continuously find new ways to
stay ahead of those who would misuse Medicare trust fund dollars.
I want to thank this committee for its support in the past and
the work that you did last year in the Balanced Budget Act to give
us some tools that we need, and we look forward to continuing to
work with you this year in this effort.
Mr. Chairman, your theme today, Preparing HCFA for the 21st
Century, could not be more in tune with my third priority, which
is the year 2000. I view the threat of a major problem with our Na-
tional information flows and the potential impact that could have
on Medicare with the utmost seriousness. And, I want you to know
that were working to do everything we can to ensure that the 74
mission-critical external systems that we have are millennium com-
pliant no later then December 31 of this year. Were using on-site
inspections and were monitoring our contractors to ensure that we
make the transition smoothly and in a timely manner.
In the next few years, HCFA will be challenged as it has never
been before. But I believe we can do the job. The list of HCFAs
accomplishments and innovations is long and distinguished, as this
subcommittee knows.
I look forward to working with all of you to achieve our mutual
goals of strengthening Medicare, extending the life of Medicares
Hospital Insurance Trust Fund, and providing beneficiaries with
the best possible care in the most efficient manner. And I view this
hearing today as good news, because I view this as a sign that
youll be working together with us as partners in this effort. Thank
you.
[The prepared statement follows:]
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Chairman THOMAS. Thank you very much. And obviously in your

oral presentation, you could not go into the depth or the breadth
that your written statement provides, and I urge all members to,
if they possibly have time, not just look at but read the written
statement, because it does provide, I think, a clear understanding
of the magnitude of the problem in front of us. And I dont think
anyone should take lightly the difficulty in one, running this orga-
nization, and two, in getting it to change, as Ive said several times
now, the basic culture.
And my friend from California points out rightly, and Im pleased
that you indicate, that if were going to ask you to do certain things
that we ought to provide you with the wherewithal to do them. We
will continue to try to do that since there are a number of people
who have differing priorities than we might, and we have to get
other people to buy our priorities and change theirs.
So there is, to a certain extent, always going to be tight dollars,
and Im always willing to fight for sufficient funds to run a pro-
gram right. But what would concern me is if I fought to try to get
funds to run a program, and then I found out that those funds
were being used for something else. I do not think in the long run
its wise to rob Peter to pay Paul. For example, Ill ask a hypo-
thetical and hopefully elicit a reaction from you.
We obviously had some priorities in making changes and funded
some areas perhaps adequately with a concern that some other
areas that someone elses priorities would indicate needed more
money were not funded as adequately. And my hope would be that
you would never use, for example, Medicare program integrity dol-
lars to finance fee-for-service contractor training, outreach activi-
ties, physician-provider satisfaction surveys; things that really are
more administrative in nature from a program that we had kind
of indicated should go in a particular direction. I would invite a re-
sponse from you about trying to move money from areas that weve
cooperated to put money in to run other areas.
Ms. DEPARLE. Well, sir, the area that you mentioned in par-
ticular, Medicare program integrity funding, is one of my top prior-
ities, as Ive said. And we fought hard together to get that money,
and it is very important that we have it. As Mr. Stark pointed out,
we are not able to review the number of claims and audit the num-
ber of providers that we want to do right now, so I would not be
pleased to hear we were using those moneys on other things. I can
understand the chairmans view on that.
Chairman THOMAS. I understand you would not be pleased to
hear that, but you are, I think, in a position to assert yourself so
that it doesnt happen, or at least make it clear that it is not your
desire if it is imposed.
Ms. DEPARLE. I would make that clear.
Chairman THOMAS. Thank you very much.
You have not been on board that long, I want to make it clear.
I believe your confirmation was November 10.
Ms. DEPARLE. I believe it was November 8.
Chairman THOMAS. November 8. Good. Because on November 7,
I asked GAO to investigate the Technology Advisory Committee in
terms of the manner in which it was meeting. I believe that the
GAO has provided us with what I thought was the case: that it
 21

was, in fact, in violation. And I would invite a brief reaction from

you, on the record, of the GAOs finding of the manner in which
the Technology Advisory Committee was meeting.
Ms. DEPARLE. Well, sir, as you know, Im a lawyer, and Im not
acting as a lawyer in my current job, but I learned a lot about the
Technology Advisory Committee in my first week on the job,
thanks to you, and I think that the GAO is exactly right. It was
not operating in a lawful manner and we wont operate that way
in the future. And I believe our response from the staff acknowl-
edged that, sir.
Chairman THOMAS. Thank you very much.
Mr. Stark. Do you wish to inquire?
Mr. STARK. Thanks, Mr. Chairman.
Some of these home health agencies are apparently now fright-
ening seniors into calling our offices. They are frightening the sen-
iors with a story that says that their benefits will be cut off and
theyll no longer be eligible for services. Now, we know thats not
correct, but is there anything that you can dowhen we can iden-
tify these scare tactics to end them? Could suggest to these groups
that it doesnt help their case?
Ms. DEPARLE. It does appear, Mr. Stark, that there is a con-
certed campaign going on to scare some of our home health bene-
ficiaries on a couple of these provisions that were enacted in the
Balanced Budget Act. Ive confronted it myself when I was trav-
eling last week and meeting with beneficiaries.
Were writing a letter to all the home health companies warning
them that if they persist in trying to scare beneficiaries and we
have evidence of that, that we will consider that to be a complaint
that would require an investigation of the agency. And were also
doing everything we can to let beneficiaries know that its not accu-
rate to say that theyre going to all lose their services. Weve also
met with the industry representatives here in Washington to let
them know of our view on that.
Mr. STARK. Thats great. And could I ask a favor? I know most
of my colleagues are more adept at understanding these regula-
tions than I am, but could I get from you a letter or a memo with
some short declarative sentences of what these complaints are and
why they are wrong? It would be helpful for me to use either in
a newsletter or in answering my own constituents to be able say
Heres what the Government says; you are being unnecessarily
frightened by these people, please report to me if that happens.
And it would be helpful to us to put those rumors to rest. Id appre-
ciate that.
Now weve got another problem. There is a fund-raising group
known as the United Seniors Association who are spreading false
information on the issue of private contracting and the Kyl amend-
ment. Could you state for the record, and Ill clip it out later, as
concisely as you can, what the law is. Do my constituents need a
private contract for something that Medicare doesnt cover?
Ms. DEPARLE. No, sir, they dont and they never have.
Mr. STARK. And if it is questionable whether Medicare covers a
particular service or not, can you explain what this advance bene-
ficiaries notice option is, again for the record, so I can tell my con-
stituents?
 22

Ms. DEPARLE. I think I can, sir. In a case where Medicares cov-

erage is questionablean example would be a test that might be
for screening purposes instead of diagnostic purposes, where the
physician just isnt surethe law provides that the physician
should give the beneficiary an advance beneficiarys notice. Thats
just a statement that says that they acknowledge that Medicare
might not cover the service and that if Medicare doesnt cover it,
the beneficiary is responsible. And then the carrier medical direc-
tors make the decision about whether its actually covered.
So, thats a simple process in those few instances where theres
some question about it. And its done that way to protect both the
beneficiaries and the physician, because in that way the physician
has notified the beneficiary that they may be responsible for paying
for it. It is not necessary that a private contract be entered into for
a physician to supply a service to a beneficiary in that way.
Mr. STARK. Thanks. Before the light goes, let me just ask you
then to comment on the fact that in 1998, were going to spend
$216 billion in benefits. By 2008, almost regardless of what the
various commissions do, were scheduled to spend some $450 billion
in benefits. That is almost a 100 percent increase over the next 10
years. The CBO estimates that well spend $3.7 billion for adminis-
tration in 1998. That will only increase to $5.8 billion in 2008. This
is an increase of maybe 50 percent55 percent. So the administra-
tive resources will decrease from 1.7 percent to 1.3 percent. At the
same time, all the other private plans spend 20 percent on average
in administrative costs. One of the lowest cost plans is in Cali-
forniaKaiser. I think they are at 12 percent Administrative costs.
HCFA is running this in single digit. Some people might want to
do the intermediaries costs, but youre still in single digit over-
head.
Can you give us some idea of what you think that portends for
our ability to go after fraud and to administer the variety of new
plans that are coming? Are you prepared to give us some idea of
how much more money HCFA will need to handle the increased
volume and the increased complexity?
Ms. DEPARLE. Well, its not a very pretty picture. The numbers
that you have cited dont portend well at all for our ability to do
the job that we need to do. I think we are managing now, but we
are just managing. I dont think were able to do everything that
this subcommittee wants us to be able to do, certainly not in the
area of combating fraud and abuse. And with a ratio like the one
you mentioned, the number of claims that we could review, the
number of audits that we could conduct, will be even less. Now, one
answer to that is doing a better job at the front end, which is what
were trying to do with some these new provider enrollment stand-
ards.
But, sir, even that, at the order of magnitude that youve talked
about and with the growth of claims and growth of the program,
wont allow us to keep up. So, we have some very serious work
ahead of us. And I think this years budget, if we can work with
this committee and your colleagues to get it enacted, is a step in
the right direction. But we certainly need more help there.
Mr. STARK. Will you indulge me for one more request, Mr. Chair-
man?
 23

What Im leading up to, for my colleagues sake, is that in the

Medicare plan we probably have fewer employees than most large
insurance companies and we are spending less, or at least the
same. Yet, were often criticized for running big bureaucracies. I
think that the HCFA bureaucracy is a reasonable bureaucracy by
any private industry standard. To that end, Nancy-Ann, would you
send me information about how many employees are active in ad-
ministering Medicare, and include how many employees the fiscal
intermediaries have? Well then try to see what we can get from
the private side to see how HCFA compares. I will provide that to
my colleagues to have some measure of how efficient or inefficient
the bureaucracy is. That will come up anyway and we might as
well face it headon. Id appreciate whatever you could send to the
chairman and myself on that issue.
Thanks very much. Thank you, Mr. Chairman.
[The information was not available at the time of printing.]
Ms. DEPARLE. Thank you.
Chairman THOMAS. That would be useful.
Does the gentleman from Louisiana wish to inquire?
Mr. MCCRERY. Yes, thank you, Mr. Chairman, and welcome Ms.
DeParle.
Ms. DEPARLE. Thank you.
Mr. MCCRERY. We look forward to working with you. Just a brief
follow-on to Mr. Starks last line of questioning, though. It would
also be interesting, I think, if we could get reliable data on the
level of fraud and abuse in the Medicare program as opposed to
private sector plans, and also, perhaps, overutilization in Medicare
programs compared to private plans. But, thats not what I wanted
to ask you about.
Two things, since you brought up the BBA, Id like for you to ad-
dress the practice expense relative values for the physician fee
schedule, and payment methodology for EPOGEN under the ESRD
program.
With regard to practice expense, as you probably know, the BBA
outlined two specific mandates on HCFA: No. 1 to require HCFA
to use to the maximum extent possible generally accepted costing
principles and those principles would recognize all staff equipment,
supplies, and expenses, not just those which can be tied to specific
procedures; and, No. 2, it required HCFA to develop actual data on
equipment utilization and other key assumptions for the May rule-
making.
So, if you could comment on those two requirement in the BBA,
Id appreciate it. And then, when you get through, Ill follow up
with the EPOGEN question.
Ms. DEPARLE. Yes, sir. Well, as you know, the practice expense
requirement is something that has been in place for some time but
this year Congress asked us to hold up on implementing it to give
more time for the kind of data that you just mentioned to be pro-
duced. We published a notice of pre-rulemaking in the Federal Reg-
ister back in October asking for help from the physician community
and others in obtaining the kind of information on actual resource
use that youre talking about.
Weve conducted three major activities involving the physician
community regarding data. On October 6 through October 8, we
 24

held 17 medical specialty panels in Baltimore and they were

charged with validating the resource data for the high-volume CPT
codes for each specialty. And all the major medical specialty soci-
eties were represented. We held a forum on indirect practice ex-
penses on November 21. And again, all the major medical specialty
societies were there. And we held a cross-specialty panel in Decem-
berfor two days in Decemberand the main purpose of that was
to standardize the resource inputs for the direct practice expenses
across specialties.
Im also aware, sir, of the comments about the accounting prin-
ciples because we have started getting comments in to our pre-rule-
making. And we will continue to look at that and to work with the
physician community on it. But I do believe we are doing what
Congress asked us to do in terms of meeting with these groups and
making sure that we give them a process and a forum to get their
input into this process.
Mr. MCCRERY. And do you anticipate that you are going to incor-
porate datanew datainto your May rulemaking?
Ms. DEPARLE. I cannot comment at this time on where that proc-
ess is. I, in fact, have a briefing on this on Friday. So, I dont know
where they are after the December meeting, but Id be happy to get
back with your staff on that.
Mr. MCCRERY. Okay. We would appreciate it if you would give
that some attention. It is of some interest to the physician commu-
nity.
No. 2, on the question of EPOGEN. And, again, if youre not pre-
pared to address this specifically, I understand, but I do want to
bring it up because it is important. Ive heard from a number of
constituents, including a treating nephrologist from the Oschner
clinic in Louisiana, that some patients have to be hospitalized as
a result of this change in policy. I believe the entire provider popu-
lation is unified behind a position in support of changing this policy
and have offered some specific changes to HCFA. Could you com-
ment on where that is and what your opinion is on it?
Ms. DEPARLE. Were looking at it, sir, and I have seen, in addi-
tion to letters from the provider community, on a bipartisan basis,
letters from you and your colleagues about this which is what
brought it to my attention. There was a program integrity problem
in this area. We want to make sure we have the best procedure
possible to make sure that the patients get what they need, but
also that we dont create a situation that is subject to abuse. And
if we need to make some changes, then well do that.
Mr. MCCRERY. Well, I would ask you to make sure that in ana-
lyzing the potential costs, that you look at overall costs, including
hospitalization and transfusions, as well as just the cost of the
hematocrits, because it could make some difference in your anal-
ysis.
Ms. DEPARLE. Yes, sir.
Mr. MCCRERY. Thank you.
Chairman THOMAS. Does the gentleman from New York wish to
inquire?
Mr. HOUGHTON. Thank you very much, Mr. Chairman. Ms.
DeParle, it is nice to see you. Thank you very much for coming
here.
 25

I guess I want to hone in for a second on the question of fraud

and abuse. You have it with the fee-for-service; you really dont
have it for the managed care because the incentive arethere isnt
any incentive
Chairman THOMAS. Amo, I apologize, but these mikes arent
working. You need to really get close to them, because I cant even
hear you.
Mr. HOUGHTON. You dont like my soft, dulcet tone?
Chairman THOMAS. I do, if I knew what it meant. [Laughter.]
Mr. HOUGHTON. Well, anyway, let me start again by saying Im
delighted you are here; thank you for being with us today.
Ms. DEPARLE. Thank you.
Mr. HOUGHTON. I guess I wanted to concentrate on the issue of
fraud and abuse because as you move more toward managed care,
there is probably less incentive, because of the direct payments to
the government, as contrasted with the fee-for-service. But I guess
the question Ive got, as you lessen that input, the question is one
of quality and how were able to ensure and emphasize the quality
aspects where the money aspects are taken care of in an entirely
different way. You may want to comment about that. And also,
maybe you might talk a little bit about child care expansion in the
limited period of time you have. Thank you.
Ms. DEPARLE. Im sorry, about what?
Mr. HOUGHTON. Child care expansion, you mentioned that.
Ms. DEPARLE. Child care expansion?
Mr. HOUGHTON. Child care expansion program is one of your
main goals, as I understand it.
Ms. DEPARLE. Oh, Im sorry; the Childrens Health Insurance
Program.
Mr. HOUGHTON. Yes, right.
Ms. DEPARLE. Yes, sir, I thought you meant day care for a sec-
ond. I was trying to think about what I knew about that.
Mr. HOUGHTON. No, thats only for senior citizens like me.
Ms. DEPARLE. Id be happy to talk about the Childrens Health
Insurance Program.
We are off to a good start. We have 16 plans from States around
the country that are in and being reviewed on a very tight time-
frame. And were moving along very quickly on that. And, weve
also been out meeting with a lot of the States to provide them with
technical assistance. There is a lot of enthusiasm out there, and at
this point, my prediction is that all 50 States will come in some
time before the end of the year with a plan, and I hope well be
able to approve them so theyll be able to get their funding and we
can begin to cover as many of the 10 million uninsured children as
possible.
Im not sure sitting here whether New York is one of those plans
or not. Is it? New York has been submitted. And I know we talked
about that when I met with you earlier.
On your other question on qualitythat is, of course, one of the
big questions that I didnt even get to in my opening statement
we are certainly trying to move in the direction of ensuring that
the new Medicare-plus-choice format for managed care plans in
Medicare will include a focus on quality. And I think this sub-
committee supported that effort with some of the provisions in the
 26

Balanced Budget Act. We have acquired all of the science to submit

on quality. Were also going out in the field to our consumers with
the consumer assessment of health plans that will be incorporated
into the kind of data that we provide them when they get their new
Medicare-plus-choice information through the beneficiary campaign
this fall.
So, I believe those kinds of indicators will be available to our
beneficiaries, and then the issue is: how do we focus our resources
on ensuring that quality is occurring. And that is a big problem
and I hope your colleague sitting two down from you, Dr. Cooksey,
can help with that. So we do have efforts underway there but we
will need to continue working with the subcommittee to make sure
were going in the right direction.
Mr. HOUGHTON. Thank you very much.
Chairman THOMAS. Does the gentleman from Georgia wish to in-
quire?
Mr. LEWIS. Thank you very much, Mr. Chairman.
First, let me welcome you in your new position and wish you
well.
Ms. DEPARLE. Thank you.
Mr. LEWIS. Your agency is facing many important challenges and
I am very confident, with your background, your talent and skill,
and your smarts, that you will lead the agency very well. And I
also want to add that I think HCFA has done a very good job in
many areas. But I do have one or two questions.
Like many Members of Congress, I have been contacted by indi-
viduals who are concerned about the provision in the Balanced
Budget Act regarding venipuncture. Theyre concerned that very
needy people will lose their home health benefit. I would like to see
HCFA monitor this situation. In light of your new responsibility,
and in light of GAO testimony, I am concerned that you do not
have enough resources to monitor this situation. Do you feel that
HCFA has enough resources to monitor this situation, or what do
you think you need to do about this?
Ms. DEPARLE. Well, as you know, sir, the venipuncture provision
was designed to reduce unnecessary utilization in the home health
program. And what our Inspector General and our staff were find-
ing was that a number of people were getting the full range of
home health care services24-hour nursing care and things like
thatsimply because they needed their blood drawn. Now if a
Medicare beneficiary needs his or her blood drawn, Medicare will
pay for that; and if they cannot leave their home or dont want to
leave their home to get it, Medicare will pay for that too. But the
point is that Medicare cant afford to bear the cost of several hun-
dred dollarsmultiples of hundred dollars a dayfor them to get
the full array of home health services if they simply need their
blood drawn.
The unfortunate thing is that some of the home health compa-
nies are trying to scare many of these beneficiaries, and perhaps
thats what youve been hearing, and other members have been
hearing.
Someone whos diabetic, someone who is frail and elderly, is like-
ly to qualify for home health. And its not fair for the home health
companiesin fact, its wrong for themto go out and tell the
 27

beneficiaries in your district that none of you are going to get this
anymore, because that is not the case. If they are qualified, if they
are homebound and they need skilled or intermittent nursing care,
they will be qualified for this benefit. The people who will no longer
be qualified are simply those who only need their blood drawn, and
the actual drawing of the blood of course will continue to be cov-
ered by Medicare.
And we do want to work with you, sir, to monitor the situation
and make sure that beneficiaries who need this service are con-
tinuing to get it. And I hope once this confusion is cleared up, that
problem will not be as apparent any more.
Mr. LEWIS. Thank you. Let me ask you another question. Nearly
40 percent of the end-stage renal disease population are African-
American, even though we make up only about 11 percent of the
population. It is my understanding that the outcome for the Afri-
can-American end-stage renal disease population is not as good as
with other populations. Could you comment on this situation? What
steps could you take that might improve this situation?
Ms. DEPARLE. Im not as familiar with the situation on end-stage
renal disease, sir, but I do know that in many of the health indica-
torshealth status indicatorsthat we look at for our population,
we find that African-American beneficiaries dont get the services
they need as often. Immunizations is an example; flu shots; mam-
mograms. In many of those areas, we find that that community is
not as well served.
We are working in partnership with historically-Black colleges
and universities around the country to try to do some focused cam-
paigns to reach that population. And I might also add that weve
been talking today about HCFAs reorganization, and one aspect of
that that I think is positive for our ability to do a better job here
is that weve created for the first time a center for beneficiary serv-
ices. That center will be the one conducting the beneficiary infor-
mation campaign. And one of their goals is to try to make sure that
they do things not just for the population as a whole, but that they
try to figure out what the best ways are to reach other populations
that may be particularly needy or vulnerable so that, with the new
preventive benefits that Congress just enacted that are very posi-
tive, we can make sure that our African-American beneficiaries re-
ceive the full promise of those new benefits.
Mr. LEWIS. I appreciate you responding. I look forward to work-
ing with you.
The Surety Association of America has reported that the way
home health agency surety bond regulations have been written,
their members are unwilling to write bonds. Will you describe for
the committee your understanding of the situation and what will
be done to resolve this issue before the bond due date of February
27?
Ms. DEPARLE. Well, as you know, Mr. Lewis, this provision that
we are talking about here is the new surety bond provision that
was enacted in the Balanced Budget Act, and it gives us the ability
to require a home health provider to post a surety bond so that if
Medicare is defrauded that Medicare will have some ability to re-
cover from them. And that is a good step forward. Thats been done
in the State of Florida, and it has had a very good result.
 28

There appears to be an issue with the surety companies about

the cumulative liability that they might have and the length of the
liability. And our staff met with the surety companies recently. Our
goal is to have the best regulation possible that protects Medicare.
And we are working with them on it. And if we need to make some
technical changes, were willing to do that.
Mr. LEWIS. Thank you very much. Thank you, Mr. Chairman.
Chairman THOMAS. I thank the gentleman from Georgia for his
inquiry in that area. We are working. This is a specific example of
where everyone on all sides, I believe, is honest and willing, its
just that the technicalities and the way in which the conditions
have to be set clearly have to be adjusted so that folks can enter
into arrangements with a clear understanding. And Im convinced
that were going to clear this up before any critical date might ar-
rive. I appreciate the gentlemans question on the matter.
Does the gentleman from Texas wish to inquire?
Mr. SAM JOHNSON of Texas. Thank you, Mr. Chairman.
Weve been having an argument up here, so I would like to ask
you the question and let you straighten the facts out. Do you have
a board that helps you run this HCFA operation, or are you
Ms. DEPARLE. No, I dont.
Mr. SAM JOHNSON of Texas. Okay, but there is a Part A and Part
B board, correct? Advisory board, or trust board?
Ms. DEPARLE. Yes, sir, there are trustees. There is a trust fund
board for Part A and Part B; yes, sir.
I am the Administrator and we have an executive council that
is the leadership of our organization that runs it. But we do not
have an outside board. But we do have trust funds for Part A and
Part B and those have trustees.
Mr. SAM JOHNSON of Texas. Okay, and your internal organiza-
tion sets the rates for each county. Is that correct?
Ms. DEPARLE. Well, not exactly, sir. Most of the fee-for-service
payments, and for that matter managed care payments, the pay-
ment methodology for everything Medicare buys is pretty much set
in statute.
Mr. SAM JOHNSON of Texas. Yes, but you change it every year.
Ms. DEPARLE. According to a formula; yes, sir. Some of those
things are changed every year according to a formula.
Mr. SAM JOHNSON of Texas. Are there any doctors involved in
that change process?
Ms. DEPARLE. There are a number of doctors in our agency, sir.
And we also have a
Mr. SAM JOHNSON of Texas. Yes, but that didnt answer the ques-
tion. Are they involved in the change process?
Ms. DEPARLE. I dont know. I believe there are some
Mr. SAM JOHNSON of Texas. You see, youre a lawyer and youre
trying to run a medical organization. Im trying to find out if youve
got any medical expertise in your organization to advise you.
Ms. DEPARLE. We do have medical expertise in the agency that
advises me.
Mr. SAM JOHNSON of Texas. And who is your closest medical ad-
visor?
Ms. DEPARLE. Well, each one of the centers has a medical advi-
sor.
 29

Mr. SAM JOHNSON of Texas. Youre dodging the question again.

I want to know who advises you personally.
Ms. DEPARLE. Probably the one who I work with the most is Dr.
Jeffrey Kang, who is the medical advisor for the Center for Health
Plans and Providers.
Mr. SAM JOHNSON of Texas. Do you know if hes ever practiced
medicine, or is he an academic?
Ms. DEPARLE. I believe he has practiced, yes. I believe he prac-
ticed in the Boston area.
Mr. SAM JOHNSON of Texas. In Boston?
Ms. DEPARLE. Yes.
Mr. SAM JOHNSON of Texas. Thank you for that.
Let me ask you another question that were discussing. Im get-
ting a lot of complaints from my military retirees about Tri-care.
How does Tri-care interface with Medicare? And when they become
65, does Tri-care still have any jurisdiction over the retired veteran
population?
Ms. DEPARLE. Well, I would like to get you more information for
the record, sir, but I can tell you that Tri-care doesnt interact with
Medicare very much, except that now, as a result of the Balanced
Budget Act, we are entering into a demonstration with the Depart-
ment of Defense to enable some of the military retirees who are not
able to take advantage of Tri-care to come to the Medicare system
and use their Medicare dollars to go to Tri-care.
Mr. SAM JOHNSON of Texas. Before 65, or after 65?
Ms. DEPARLE. After 65.
Mr. SAM JOHNSON of Texas. Okay. So what youre telling me is
Tri-care should continue after 65. I thought it was a law that ev-
erybody had to get on Medicare at 65.
Ms. DEPARLE. It has been. But, what Im saying is there is a
demonstration that will allow a military retiree to take his Medi-
care coverage and go to a Tri-care facility. And that will be start-
ing, I think, sometime in the next year.
Mr. SAM JOHNSON of Texas. And that means a veterans hospital,
does it not?
Ms. DEPARLE. No, it means probably a DOD facility and they
contract in various areas. There is not a provision for veterans at
this time, although I think this subcommittee has been working on
that.
Chairman THOMAS. Will the gentleman yield on that point?
Mr. SAM JOHNSON of Texas. Sure.
Chairman THOMAS. The Department of Defense has been inter-
ested in the retired military and its possibility of utilizing Medicare
dollars for military retirees at military hospital facilities or con-
tracting out through the military in an effort to broaden the sup-
port structure for military hospitals. That is the program that
youve been discussing.
Veterans, in what they call a vision program, worked on by the
Veterans Administration, have wanted to have a demonstration
program, similar to the military retirees, for those veterans that
fall into the category of A versus C kind of a veteran; that is those
who have the wherewithal normally. We areChairman Stump of
the Veterans Committee and I the chairman of this subcommittee
are going to offera piece of legislation which will model a vet-
 30

erans demonstration program for that aspect of the veterans hos-

pitals with the upper-income veterans, like the Tri-care demonstra-
tion. But we will go beyond that, and in dealing with the low-in-
come Medicaid-eligible-type veterans, were going to create a per-
manent program, rather than a demonstration because there is a
clear need. And Dr. Kizer of the Veterans Administration is in full
agreement that we can go to a contracting-out basis so that vet-
erans can get the filled prescription, outpatient medical care that
normally had been delivered by outpatient clinics or veterans hos-
pitals closer to home, since we cant continue to invest in bricks
and mortars for the veterans.
The short answer is: there is a degree of innovation going on
among other government medical programs principally focused on
the DOD and the veterans, to see if, since every World War II vet-
eran is a Medicare-eligible person as well, if we cant tend to inte-
grate these programs from the senior level back in so that we can
mainstream some of these Government medical programs that
have remained distinct and separate.
Mr. SAM JOHNSON of Texas. Thank you. I appreciate that. That
leads to another question though. If there is private contracting
within the Tri-care or Medicare system, how do you distinguish be-
tween what private contracting is and what it isnt? And how are
you going to stop a doctor from doing a private contract with Vet-
erans Administration for a person thats over 65 and keep him
from it in the Medicare system?
Ms. DEPARLE. Sir, I dont believe what were talking about is pri-
vate contracting in the way that you
Mr. SAM JOHNSON of Texas. I know, I just brought it up.
Ms. DEPARLE. I dont believe the two are the same thing. What
the chairman is talking about is a demonstration to allow certain
veterans to use their Medicare dollars in a veterans hospital.
Mr. SAM JOHNSON of Texas. I understand, but you were talking
with Mr. Stark earlier about private contracting and you indicated
that if the Medicare program does not cover something and a per-
son can make that payment on his own its not considered private
contracting. The docs dont know that by the way. You need to get
that word out. Im getting a lot of complaints in my district over
thatthat theyre, in fact, stopping their Medicare service because
of that threat. So when youre going to authorize them to privately
contract with the Veterans Administration for care, I dont see the
difference.
Ms. DEPARLE. Well, sir, as I understand the demonstration, and
Id be happy to provide a briefing for you and your staff on it, but
as I understand it, it isnt private contracting. What were saying
is that veteransit is more like allowing the veterans system to be
one of the new Medicare-plus-choice plans. But its on a demonstra-
tion basis. So, I dont believe its the same thing as private con-
tracting.
Mr. SAM JOHNSON of Texas. Well, then define private contracting
for me.
Ms. DEPARLE. Well, as I understand private contracting as en-
acted in the Balanced Budget Act, what that says is that if a physi-
cian and a beneficiary want to enter into a private contract to cover
some benefit that Medicare would ordinarily cover, then they can
 31

do that. That has not been something that has been allowed in the
past. So thats what private contracting is. This is different. This
is saying that a Medicare-eligible veteran or military retiree could
chose a health plan that is provided by DOD or VA.
Mr. SAM JOHNSON of Texas. Or a doc.
Chairman THOMAS. No, let me interject again, and I apologize.
But when I used the term contracting, it was contracting out its
managed care services. It is a requirement, pretty obviously, in a
military hospital that if youre going to treat Medicare-eligible pa-
tients, you have to be able to offer those services that are part of
the Medicare package. If the military hospital does not have the
ability to deliver all of those aspects of the required Medicare pack-
age, they can contract out for those aspects. But it is primarily en-
visioned as contracting out to those entities in those communities
where there are military retirees that do this on an ongoing basis
with ordinary Medicare beneficiaries. So it would be contracting
out, but it is primarily managed care services. But Id be willing
to sit down with the gentleman and go over what I consider to be
some relatively positive innovative approaches already underway at
the DOD and the possibility of beginning at the Veterans Adminis-
tration to make sure that his concerns, if at all possible, could be
addressed in the way in which the demonstration is designed.
Mr. SAM JOHNSON of Texas. Thank you, I appreciate that. You
know, I would just like to know your views on that too, because pri-
vate contracting is private contracting, you know, any way you cut
it.
Chairman THOMAS. I understand that. And given the gentle-
mans background and current status, hes a practitioner and I
want to listen to him.
Mr. SAM JOHNSON of Texas. Well, I tell you what, the guys in
the military complain about the system and the way its operating.
And we need to protect them. And thats part of HCFAs job, I be-
lieve.
Ms. DEPARLE. Wed like to work with you on the demonstration
and with the committee.
Mr. SAM JOHNSON of Texas. Thank you, maam. And thank you,
Mr. Chairman.
Chairman THOMAS. Thank you very much.
The gentleman from Maryland.
Mr. CARDIN. Thank you, Mr. Chairman.
And let me welcome you here in your new responsibility. This is
your first appearance, I believe, and we look forward to working
with you, following up on last years work of this committee in try-
ing to improve the Medicare system and the other areas that fall
under your responsibility. It is a pleasure to have you here.
I just want to make a comment about one of Mr. Johnsons state-
ments, and that is I know we got a little bit off on the private con-
tracting, but it is my understanding that you have sent notices to
all physicians indicating that if its a non-covered service there is
no need for a private contract. And that notice has gone out.
Ms. DEPARLE. Yes, we did. That went out in November, and we
sent it out to all the physicians in the country.
Mr. CARDIN I want to change gears and talk about the prudent
lay persons standard for emergency care. And we very much ap-
 32

preciate the help of the administration last year in putting that

standard in law for the Medicare and Medicaid programs in requir-
ing that on the renewals that there be that standard adopted. And
Im just wondering if you could update us as to what steps youre
taking to make sure that all of the plan administrators and States
are complying with the prudent lay persons standard in their man-
aged care programs?
Ms. DEPARLE. Let me just say, Mr. Cardin, that we appreciate
your work on that. And thats been something that I know that you
have championed for many years, and I was glad that we could get
it enacted last year. I think its a good step forward.
We are working to make sure that all the State Medicaid direc-
tors are aware of the new standard and that they have it in place.
And I believe your staff has made us aware that some of them may
not be where they need to be, so we will take some steps to remedy
that, and I will report back to you on it.
Mr. CARDIN. I appreciate that. Its been brought to our attention
and weve got some material, from the State of Maine and the
State of Georgia, which appears to be out of compliance with Fed-
eral law. We understand there may be some confusion, but we
would urge that you give this a high priority to implement the law.
Its becoming more and more common around the Nation for more
and more managed care plans to adopt the prudent laypersons
standard, so it should not be as difficult as perhaps it would have
been a few years ago. And I would just urge you to continue your
efforts in that regard.
Ms. DEPARLE. We will do that. Thank you.
Mr. CARDIN. Let me return, if I might, and spend a little more
time on the private contracting issue. There has been a lot of mis-
information out on the private contracting issue, and I really do ap-
plaud you for getting information out to the physicians. We may
need to take a look at what we did last year in order to clarify the
position, to make it clear that we havent impacted the ability of
a Medicare beneficiary to use private services and pay for it if its
not under the Medicare program. I would just urge you also to
work with us, if we need to, to clarify that law without removing
the protections that seniors currently have on balance billing pro-
tections. Because I dont think anyone here wants to subject our
seniors to charges beyond what the Medicare system allows for
services that are provided under the Medicare system.
Ms. DEPARLE. Well be happy to work with the committee.
Mr. CARDIN. Thank you. Thank you, Mr. Chairman.
Chairman THOMAS. Thank you.
Does the gentlewoman from Connecticut wish to inquire?
Mrs. JOHNSON of Connecticut. Thank you, and welcome.
Ms. DEPARLE. Thank you.
Mrs. JOHNSON of Connecticut. We look forward to working with
you. You certainly have many challenges facing you, as do we as
a legislative body, to make good on our often repeated promise of
making Medicare secure, not only for current retirees, but future
retirees.
There are two little issues I want to raise with you, and then one
larger issue. First of all, during the break I visited a large oncology
office in my district and it is very clear to me that we are not reim-
 33

bursing for many of the costs associated with delivering oncology

drugs. And, its my understand that HCFA has been reviewing the
RBRBS in this regard and acknowledges that delivery services are
not covered in the RBRBS. They have traditionally been covered
through the drug costs. If that isnt going to be the case, I mean,
were going to have to get this together and look clearly at whats
covered by the RBRBS and whats been covered by the drug cost.
And if were going to look at drug costs as the Inspector Generals
report does without regard to the cost of delivery, then we need to
reexamine the RBRBS and make sure that it is an honest one and
does cover all the services delivered by the physician. So, I would
hope that you wouldnt move on the drug costs without a review
of the RBRBS. I understand that the Department is in the process
of that, or has at one time in the not too distant past been involved
in that issue, and is cognizant that the RBRBS has problems. Are
you conscious of that problem?
Ms. DEPARLE. I did hear about this, in fact just yesterday. And
as the representative knows, there has been a problem with Medi-
care overpaying for some of these drugs, and that is a concern of
ours, that Im sure is of the committees as well. But certainly, we
want to be fair in the way that we provide reimbursement, and I
will take a look at what you are pointing out.
Mrs. JOHNSON of Connecticut. I am very, very concerned about
this, because if we do it wrong, then these services will simple
move from the doctors office to the hospital where they will be
more expensive to deliver. Because infusion therapy takes time and
a lot of that is now going on on an out-patient basis, if we do this
wrong, we will simply shift the venue and increase our cost even
though it might look to the public like we are saving. So, I look for-
ward to working on this with you. I think its an absolutely solv-
able problem. We want to be fair to everybody. We want to be sure
that we dont overpay providers of drugs, or services. But I think
in this situation, we have allowed reimbursement for services to
slip under reimbursement for drugs, and we have to sort that out.
So, I look forward to working on this with you because Im very
concerned about access to care. If we do it wrong, access will plum-
met, hospitals will have to gear up, and well have a significant
problem on our hands for very sick patients. And we just have got
to make sure that that doesnt happen.
Then, a second thing thats been of concern to me is that theres
more than two-dozen regulations and reports that are due that
havent been completed, and one of them is in regard to the func-
tioning of the Medicare select plans, and some of the other regula-
tions that are so key for home health agencies. I wonder what your
program is to get caught up on some of these?
Ms. DEPARLE. Well, if I can brag a little bit, we have made a lot
of progress. In the month of December, we identified 18 priority
regulations that we needed to get out, and I think we got 16 of
them out in December, which is more than double what we nor-
mally do. And of course, that was supposed to be a holiday month.
So our staff is really working hard.
I place a high priority on being as timely as possible. Given our
resources and the priorities that this Congress has set and that I
have to set, sometimes its not possible, but, Im going to do my
 34

very best to see that we are timely. And I wasnt aware that there
were two-dozen reports that were overdue. I am very aware of the
Medicare Select Report, and have personally reviewed it, and I
hope that we will be able to get it to you soon. I believe that one
was due on December 31, so we are behind on that.
Mrs. JOHNSON of Connecticut. Yes, it was. Thank you very much,
I look forward to seeing that move. I assume thats out of your shop
at this point, since you have reviewed it?
Ms. DEPARLE. I believe it is.
Mrs. JOHNSON of Connecticut. Is it then at OMB?
Ms. DEPARLE. Yes, I believe thats where it is.
Mrs. JOHNSON of Connecticut. Well, well certainly look forward
to the completion of this work. And any way we can help you, were
happy to because I believe timeliness is important. And its a big
problem. I chair the Oversight Subcommittee of the IRS. I can tell
you, they are much further behind than you are.
Chairman THOMAS. Thats not a compliment.
Ms. DEPARLE. I know that.
Mrs. JOHNSON of Connecticut. Its like justice delayed is justice
undone, you know. If we dont keep the flow of information going
we dont win. And I see, unfortunately, my time has expired, be-
cause I do want to just point out to you the terrible problem were
having with dual-eligibles. And I see you are reorganizing in a way
that will create a more one-stop shopping approach to managed
care and fee-for-service policy, but we really have to look at the
dual-eligibles and I think we have to look at what I consider to be
a real rip-off of Medicare: the Medicare maximization program. The
States are spending tons of money on this. They are squandering
their resources and ours on all the legalities. The home health
agencies are really disadvantaged by the problem of going back for
these records, of copying them, of reviewing them. Its really a trag-
edy. And when the whole system is under so much pressure to re-
duce costs, deliver quality services, I think we need to sit down
about that Medicare maximization program and come to terms
with it and settle it out, which we can do and we started doing
three years ago, and it still isnt completed. Then that folds right
into the dual-eligible project that weve got to start piloting in some
of the states in order to give better service to low-income seniors,
but also reduce the cost for federal and state government. So Id
like to work on that project with you.
Ms. DEPARLE. Ill look forward to working with you on it.
Mrs. JOHNSON of Connecticut. Thank you very much.
Chairman THOMAS. Its my pleasure to indicate that a Member
who is not a member of this subcommittee is with us today. He is
a freshman Member of Congress, but I have a hunch that one of
the reasons hes more interested in this is not in that capacity, but
because he is a medical doctor, doctor of ophthalmology. Gentleman
from Louisiana, Mr. Cooksey, I assume wishes to inquire.
Mr. COOKSEY. Thank you, Mr. Chairman. And Ms. DeParle, wel-
come to the committee. This is my first committee meeting too.
Im on the Health Subcommittee of Veterans Affairs, and theres
a lot of confusion about some of the overlap here.
My questionthe question I would like for you to answerand
Im going to drive toward thatis, do you ever step back and look
 35

at the overall picture? There are a lot of programs that are govern-
ment paid, that are government financed. Theres Medicare, theres
Medicaid, there are veterans hospitals. Incidentally, Ive asked the
same questions in my health subcommittee.
There are many providers, there are many recipients. There
must be some duplication occasionally. I personally think theres a
lot of duplication, a lot of overlap. And I think there are a lot of
regulators and a lot of regulations, and these solutions have always
been done piecemeal to solve some problem. And its been my im-
pression when I was out in the private sector that theres been a
lot of micromanagement by people in the bureaucracy, like yourself;
a lot of lawyers, a lot of people that are in government, that are
micromanaging the problems as they come up.
But I feel that we do need to eliminate this duplication. We need
to downsize some of the bureaucracies. We definitely need to re-
duce the cost. And the way to do that is by quality health care.
When you have really quality health care, a patient wont have to
go back to have the same procedure repeated because it was not
done right the first time, and that will reduce cost.
But my question is, is there anyone that is out there that ever
steps back, and looks at the overall picture, and say, gee, who is
representing the patients?
When the Balanced Budget bill was coming through, there was
a firestorm of activity. You were not here then, I know. But there
was every group being represented, except the patients, I feel.
There were bureaucrats here, there were the managed care people,
there were the insurance companies, there was organized medicine,
there were physicians, there were specialists, home health, and
yes, even the trial lawyers. But they were there ad infinitum. But
nobody really seemed to be representing that patient that is out
there in some rural area or some inner city metropolitan area that
truly needed health care. And youve got a lot of special interest
groups that are still micromanaging things for their best interest.
What is your agency doing to look at the big picture, and to real-
ly address the number one stakeholder, the patient?
Ms. DEPARLE. Well, I think one thing weve done, and I described
it at the beginning of my statement, was, our reorganization was
partly designed to try to get at those questions of, are we serving
beneficiaries, and how do we organize ourselves so that were
thinking more about beneficiaries. That is why we created this
Center for Beneficiary Services.
If we had not done that reorganization, the new Medicare Plus
Choice Plan and the information campaign that were going to do
this year, those activities of providing the information, and the toll
free lines, and the things that the Congress has asked us to do to
interact with beneficiaries, would have been in five or six different
locations within HCFA. Now we have centered in one place an or-
ganization that is designed to look at that.
I also think in respect to your comment about the veterans area,
thats actually an area about which I think the Congress can feel
good trying to look at whats best for the beneficiary, as opposed
to how do these structures in Washington work. And the reason I
say that, is because what that demonstration is designed to look at
is, if you are a veteran and you are Medicare eligible, why
 36

shouldnt you be able to go to a veterans hospital if you want to,

and take your Medicare dollars with you? You couldnt do that be-
fore. You could only go there if you were in the high-priority cat-
egory of veterans. And as you know, even though there are 171 vet-
erans hospitals, not everyone can get to one, and not all veterans
have a high enouogh priority to obtain VA care when needed.
But the beneficiary shouldnt have to worry about that; the bene-
ficiary should be able to choose where they might want to go. And
thats what that demonstration is designed to investigate. So, I
agree with you that it is very difficult to get beyond the structures
that we operate in, and I think we need to do a better job at that.
And I think we can do a better job of that, and I think members
like those on this subcommittee are going to help us with that.
Mr. COOKSEY. Good. One other quick question. Where does
HCFA stand on implementing the BBA for telemedicine and for
broader plans for telemedicine?
Ms. DEPARLE. We have some demonstrations that we had al-
ready started in telemedicine. I think they are in five states. In the
BBA we got authority for 1 more demonstration, and I believe we
have a rule that is on track, to go out in May that will announce
how that new authority will be used, and how folks can become eli-
gible for the telemedicine programs.
Mr. COOKSEY. Thank you, Ms. DeParle. Thank you, Mr. Chair-
man.
Chairman THOMAS. Certainly. Thank you.
Apropos the comments by a gentlewoman from Connecticut, what
would your reaction be when we deal withand hopefully we dont
have to deal with them in the near futurereports or information
that was required by the statute in terms of getting work product
done? Your initial response is the one that we always get; its in
the process.
Given your experience, both being in OMB, and now over at
HCFA, as an example, what does it mean when its in clearance?
How many different steps, not micro steps, but major steps, does
a policy like Medicare, for example, have to go through before we
get it, since it was our request in the first place?
Ms. DEPARLE. Well, in that particular instance, we were required
to conduct some studies of Medicare Select, the demonstration, to
see how it worked and whether it met your objectives.
Chairman THOMAS. Is that a good example or do you have a bet-
ter example that would explain to us how the process works?
Ms. DEPARLE. I think its a pretty good example
Chairman THOMAS. Okay.
Ms. DEPARLE [continuing]. Because it was pretty matter-of-fact.
We have done some studies and done some analysis. And then
there are two processes. Most of these things are not reports from
the HCFA administrator, but they are reports that you have re-
quested from the secretary. And so, the secretary obviously is
briefed, and her staff looks at whatever report it is, and then it
goes from there over to the Office of Management and Budget. And
at the Office of Management and Budget there are two processes.
Chairman THOMAS. Why does it go there?
Ms. DEPARLE. There is I believe an executive order thats been
in place for 30 years
 37

Chairman THOMAS. A long time.

Ms. DEPARLE [continuing]. that requires that kind of review, and
there are actually two review processes. One of them is the
Chairman THOMAS. Just as the budget from HHS has to go
over
Ms. DEPARLE. Right.
Chairman THOMAS [continuing]. And be reviewed by OMB before
its incorporated in the structure, these kinds of things do as well.
Ms. DEPARLE. Thats right. And there are two processes gen-
erally. One is the Office of Information and Regulatory Affairs,
which looks at whether something that were putting out imposes
a paperwork burden. For example, a regulation or that kind of
thing. And then there is a substantive review of the policy by budg-
et and program policy staff. And its generally a fairly quick proc-
ess.
Having been there, I know that the folks at OMB often feel that
we give them very little time to review things to get them up here
to you. But the purpose of the review is supposed to be to ensure
that the report has been done in an adequate fashion and that it
is consistent with the programs of the President; thats the general
policy.
Chairman THOMAS. And then does it often times or occasionally
go back for revision, refocus, adjustment, or does the adjustment,
refocus occur at OMB in consultation with folks?
Ms. DEPARLE. It can operate either of those ways. In general, I
think it probably goes back with comments and suggestions, and
we often have meetings with the staff from the agencies to discuss
comments and suggestions.
Chairman THOMAS. All this leads up to my question, from your
experienceand its useful because youve been in both areas. And
I dont want to overly complicate the process. But it would be use-
ful for us sometimes to know when, for example, you folks were fin-
ished with something. And I dont know that it needs to be more
structuredif it does, well talk about putting it in legislationso
that we know that at least from a policy point of view its out of
HHS, and that its someplace else, almost always OMB.
Or do you believe that thats a transparent enough process, that
if you ask the right questions you know it anyway? Does it need
to be more formalized in terms of our ability to know when it
moves through stages?
Ms. DEPARLE. I dont think so, Mr. Chairman. I think that the
process generally works pretty well. I think theres generally value
added from the process, and it works pretty well. I regret that
were behind in scheduling these reports to you, and perhaps we
should have gotten them over there earlier. I think that is maybe
sometimes the reason why theyre late.
Chairman THOMAS. Well, and Ive discovered that you can elimi-
nate a lot of legislation and a lot of particulars if you have honest
people working together and you get honest answers. When you
dont get honest answers, its very, very difficult to put confidence
in what people have to say.
It pains me a little bit to bring up, earlier in my chairmanship
a time of visiting HCFA in Baltimore, and not getting what I con-
sidered to be honest answers about the Medicare transaction sys-
 38

tem, which I believe has finally been owned up to. And in your
written testimony, Ill refer to once again, a clear indication that
you have finalized the contract with that, and that perhaps the
concept at some time may have had a degree of viability, but it is
no longer the case.
Ms. DEPARLE. Thats right.
Chairman THOMAS. Youre looking for another way or perhaps a
fundamental rethink of the way of dealing with the tracking sys-
tem, is that correct?
Ms. DEPARLE. Thats right.
Chairman THOMAS. Would you consider youre entering into, fill
in the blank, a $50 million, $70 million effort, which has really pro-
duced nothing, a kind of a failure, or did we learn something out
of it?
Ms. DEPARLE. Well, I think we learned something; it was pain-
ful. I think we learned what a lot of private sector companies have
learned, that a big effort like that was too big and too risky.
Chairman THOMAS. And I guess then, were involved with ques-
tions of judgment; how things get started, how they get perpet-
uated, where you make decisions, where you stop. In private sector
when you have failures of that magnitude, usually someones out
of a job.
My concern is, that for the last several years younot you, the
agencyhas been run on a kind of a pass/fail basis, and Im just
wondering if anybody failed on the pass/fail judgment, based upon
this multimillion dollar program that has now been completely ter-
minated, with very little residual benefit?
Ms. DEPARLE. Well, I think, as you know, Mr. Chairman, be-
cause you visited us, we have a lot of talented people at the Health
Care Financing Administration, and theyre all committed to trying
to do the best job they can for our beneficiaries. And I think that
everyone who was working there learned a lesson from the Medi-
care transaction system, and we arent going to do it that way
again.
Chairman THOMAS. Has anybody received a failure on any of
those evaluations on a pass/fail basis in terms of the staff at
HCFA?
Ms. DEPARLE. I dont know the answer to that. I do know that
most of our employees, since that pass/fail system was initiated,
have received a pass. I havent looked through the 3,000 or so eval-
uations to see how many of them got a failure. There have been
some failures. I dont know if they were connected with that par-
ticular program.
Chairman THOMAS. And I dont want anyone to assume by my
line of questioning that I dont think that there arent a lot of tal-
ented hardworking people over there. Its just that when youre
dealing with a fundamental change in the direction and culture of
a bureaucracy, you have to look at your ability to be flexible in
dealing with employment, and frankly, to make changes.
My concern is, the manner in which employees are evaluated,
probably doesnt give you a sufficient ability to make decisions, ex-
cept that you probably, as is the case when the formal monitoring
structures not adequate, you do it in an informal way, which is the
way we want to do it, because then that can be argued to be subjec-
 39

tive rather and objective. And I know through GAO examination

that a simple bifurcated pass/fail maybe doesnt tell you as much
as youd like to know. You need more categories in which to evalu-
ate folks, so that you can reward people who clearly are superior
and show initiative. Because its very difficult when you have peo-
ple sitting next to each other, and someones doing work, and some-
one else isnt doing quite as much or even any work at all, and they
both get the same grade. The morale in that kind of an environ-
ment is very difficult to deal with.
Let me ask you a question which I dont consider unfair, some
might, but its clearly a hypothetical given the current situation.
And that is, if Congress gave you the authority to examine criti-
cally a fixed number of folks, 5 or 10 percent of your entire work
force, and you would make the decision on whether to keep them
or remove them on purely a merit analysis, not constrained by any
contract obligations, union, or otherwise, is that something thats
desirable, not necessary, you would rather not talk about at this
point?
Ms. DEPARLE. Well, let me just say that your questions are going
to the issue that I think is the most critical one for us over the next
few years, which is how do we manage our human resources. How
do we make sure that people are getting recognized for the work
that they do, which is very difficult in government, frankly.
Its hard for them, frankly when they continually hear that
theyre not doing a good job. They want to be recognized for im-
provement that they make and for the effort that they put forth.
And that is a big challenge to me as a manager.
As to whether or not it would be a good idea to change the eval-
uation process, we discussed that, and its certainly something that
Im willing to look at. I have operated under different evaluation
processes. There have been times in my life when I liked pass/fail,
like when I was in college, but I think in general it probably
doesnt give us the kind of information that we need. But most of
our problems are problems of managers being able to make those
kinds of decisions, and I want to do everything I can to empower
our managers to do that.
Chairman THOMAS. My interest and concern I want to place very
carefully out front and objectively.
HHS and HCFA have extremely important jobs to do. We are
dealing with a changing environment in the private sector, and ob-
viously now in the government sector. Flexibility in dealing with
the management and the employees who oversee this I think is as
critical as flexibility in the marketplace on product. For us to be
locked into, old-fashioned government and union regulations, which
dont allow us to do the kind of innovative change that I think is
going to be necessary, will ill serve the agency, and frankly fun-
damentally the beneficiaries.
I am not interested in busting up anything at all; I am interested
in a viable functioning agency, carrying out a very critical job thats
going to be more difficult in the near future. And I believe the gen-
tleman from Louisiana wanted me to yield, and Ill yield to him.
Mr. MCCRERY. Thank you, Mr. Chairman.
Ms. DeParle, just one more question. With regard to the MSA
demonstration project, can you give us an update on how its going?
 40

And when you answer the question, please tell us whether under
an MSA Medicare product physicians or providers, generally, must
bill according to the Medicare fee schedule or are they allowed to
bill higher than 115 percent of the Medicare fee schedule?
Ms. DEPARLE. Well, Im happy to report that the MSA dem-
onstration project, our plans for that are on track. And in fact, I
believe weve done some briefings of some of the committee staff on
that, and we have been working with the folks at the Treasury De-
partment, who have done a similar demonstration as you know in
the private sector.
With respect to the balance billing limits, I believe that they
would not apply, because the whole concept of an MSA is to have
the beneficiary bearing more of the cost, and the idea is supposed
to be that they will then be more sensitive to cost. And I believe
that in that demonstration they will be, so to speak, on their own.
Mr. MCCRERY. Thank you.
Chairman THOMAS. Gentleman from Maryland, a brief interven-
tion.
Mr. CARDIN. Thank you.
One additional point under BBA that I just want to bring to your
attention, that is the GME payments to quality non-hospital pro-
viders gives you an opportunity for the first time to move into a
somewhat different area. What were concerned about is that we do
have some public health departments that would be interested in
looking at establishing residencies in public health that could help
us in this area. Its probably not going to be allowed because they
dont have contracts under Medicare.
But I would ask that you would take a look and work with us
as to whether it would be worthwhile to look at a demonstration
in this area. And I just really wanted to bring it to your attention,
and hope that we could work in that area.
Thank you, Mr. Chairman.
Mr. STARK. Could I follow up?
Chairman THOMAS. This is a first, not a last. So if anybodys got
anythingshes going to be back. Go ahead.
Mr. STARK. Well, I just wanted to follow up on the question that
Mr. McCrery asked regarding Medicare MSAs. I understand how
that works when beneficiaries are spending their own deductible
lets say its a $2,000 deductible. But after that, would Physicians
not then be required to, bill Medicare under the standard proce-
dure? Would the balance billing limits apply? Would the Medicare
DRGS be applicable?
Maybe you could enlighten me there? After the out-of-pocket-de-
ductible is spent.
Ms. DEPARLE. I understand your question, Mr. Stark, and I know
that this came up a month or so ago, and our Office of General
Counsel was looking at it. And if I could, Id like to get back to you
for the record on it, because I dont want to say the wrong thing
here. But I do understand the subtlety of your question.
Mr. MCCRERY. Could you copy me on that?
Ms. DEPARLE. Oh, certainly.
Mr. STARK. Yes. I mean, I
Chairman THOMAS. Would you submit it to the subcommittee?
Mr. STARK. Yeah, that is
 41

Ms. DEPARLE. I would submit it for the record.

Mr. STARK. I dont know how else you would pay.
If it were my Medicare MSA and Id paid the $2,000 deductible
how would my physician collect after I paid my personal check for
any future treatment? Wouldnt he bill Medicare in the standard
way that he or she does now?
Mr. MCCRERY. Well, the way I understand itand this is why
we need to have this clarified. The way I understand is that under
the MSA product, that government would give the patient, the ben-
eficiary, a lump sum to cover the cost of the insurance product;
therefore the doctor would bill the insurance company, not Medi-
care, for amounts above the deductible, but I could be wrong on
that.
Chairman THOMAS. Yes, basically
Ms. DEPARLE. I think I need to get back to the committee with
a fuller answer. I understand the question. Thank you.
Chairman THOMAS. And let me for all the members of the sub-
committee, thank you. I personally want to thank you for your
availability, prior to be being formally I may had and since, and
I look forward to working with you. You have an extremely difficult
job thats challenging. Ill know youll be up to the task, but in any-
way that we can help, especially with fine tuning what was, as I
said at the beginning, the most comprehensive change in Medicare.
People vote and move on, and people dont realize that after youve
voted we have a lot of work to do. And I look forward to working
with you. Congratulations.
Ms. DEPARLE. Thank you. I will need the support and the con-
structive criticism of this committee, in doing what you want us to
get done, as well as of all of our employees. So I appreciate this
opportunity.
Chairman THOMAS. Thank you very much.
The next panel will be, once again, a panel of one, or one and
a half, or two perhaps.
Dr. Scanlon, who is the director of the Health Financing Sys-
tems, part of the General Accounting Office, who has done some re-
cent work for us at our request, and they have had an ongoing pro-
gram as well. And with him is Leslie Aronovitz, who is the asso-
ciate director in the same area of the Health Care Financing Sys-
tems of the GAO.
Dr. Scanlon, thank you. Your written testimony, as always, will
be made a part of the record, and you can address us as you see
fit.
STATEMENT OF WILLIAM J. SCANLON, PH.D., DIRECTOR,
HEALTH FINANCING SYSTEMS, U.S. GENERAL ACCOUNTING
OFFICE
Mr. SCANLON. Thank you very much, Mr. Chairman, and mem-
bers of the subcommittee.
We are very pleased to be here today as you discuss HCFAs
readiness to manage Medicare for the 21st century.
Chairman THOMAS. And let me indicate to you as well, although
normally that distance would be appropriate, youre probably going
to have to get a little closer to the mic, so people can hear you.
Thank you.
 42

Mr. SCANLON. Okay. All right, Id be happy to.

The Congress and this subcommittee in particular has heard
from GAO and others regularly about Medicares vulnerabilities,
including program management weaknesses, excessive spending,
and trust fund deficiencies. You also heard from us in October that
the Health Insurance Portability and Accountability Act and the
Balanced Budget Act provided HCFA excellent new tools to fight
fraud and to fix broken payment methods. However, substantial
agency effort, as you indicated, will be required to implement the
new provisions promptly and effectively.
In addition, the agency has undergone a major reorganization. In
that context you asked us to comment on HCFAs capacity; that is,
the ability of its work force to meet its newer challenges, while re-
sponding to the chronic problems of the past.
To provide a quick response, we spent the past month reviewing
agency documents, conducting focus groups, and interviewing indi-
viduals. We heard from more than 60 senior level and mid-level
managers at HCFAs Washington and Baltimore headquarter of-
fices.
We want to thank Ms. DeParle and the HCFA staff for being so
cooperative and congenial as we imposed our demands upon their
already existing daunting workload. On the basis of the informa-
tion we gathered, as well as the information that we have gathered
over the years of working on different elements of the Medicare
program, we make the following observations.
To begin, HCFA clearly has a lot on its plate. Under the Bal-
anced Budget Act it must implement the new Medicare Plus Choice
Program. It must develop multiple prospective payment systems,
and improve Medicares pricing of goods and services consistent
with the concept of inherent reasonableness.
For each theres a considerable volume of choices about design
details that must be formulated, evaluated, selected, and imple-
mented. Theres been a long-standing consensus that implementing
changes, such as prospective payment or improved risk adjustment
for managed care, are essential steps. What we have lacked is con-
sensus and confidence in how to do these effectively and fairly.
Now HCFA must seek to do so within tight timeframes.
HCFAs attention is also required to effectively implement the
new contracting authority provided by the Health Insurance Port-
ability and Accountability Act, the Medicare Integrity Program, the
anti-fraud program under that act. The Inspector Generals esti-
mate of $23 billion in inappropriate payments dramatically under-
scores the urgency of this task.
At the same time the agency must solve its year 2000 computer
problems, and start from scratch to develop a comprehensive infor-
mation management strategy that will deal more effectively with
identifying problems with inappropriate fee-for-service claims, and
support the information requirements of the expanded Medicare
Plus Choice Program.
Concurrent with these implementation challenges, HCFA is
handicapped in a number of ways. Managers are feeling pinched by
the Balanced Budget Acts command of existing resources. They ex-
press fears that because of the agencys concentrated efforts on the
Balanced Budget Act, the quality of other work might be com-
 43

promised or tasks might be neglected altogether. They also felt dis-

advantaged by HCFAs limited expertise to carry out certain new
Balanced Budget Act initiatives, such as the upcoming nationwide
comparative information campaign for the Medicare Plus Choice
plans, or the Balanced Budget Act related work that was already
underway, such as new prospective payment systems for home
health and skilled nursing facility services.
Some of this work involves the need for new skills and expertise
that HCFA did not require previously; however, managers also felt
the agencys capacity has been compromised by the loss of experi-
enced staff resulting from a work force turnover of nearly 40 per-
cent over the last 5 years.
Regardless of the benefits that may ultimately accrue from
HCFAs reconfigured structure, the reorganization also compounds
the challenges for the agency. The normal stresses people experi-
ence with organizational restructuring have been accentuated by
the full agendas and the tight deadlines of HCFAs new workload.
Managers feel that during this transitional period the situation
is particularly acute in light of the fact that people have not yet
even moved to the actual location of their new units. Physical prox-
imity would help forge the new working relationships among indi-
vidual staff essential to achieving the objectives within the new
structure.
From some perspectives HCFAs substantial and growing respon-
sibilities appear to be outstripping its capacity. Before such a con-
clusion about the extent to which the tasks are exceeding its capac-
ity are made, it must be noted that the agency lacks a comprehen-
sive plan, one that senior decision-makers could use to strategically
handle the agencys workload and resource management. As a re-
sult, it appears that senior management is not in a position to as-
sess fully the adequacy of its resources, whether they are properly
distributed, or which activities could be at risk of being neglected.
In contrast, top managements expectations for completing Bal-
anced Budget Act-related activities are very explicit. HCFA has a
tracking system for the Balanced Budget Act mandates that enu-
merates activities, identifies responsible agency units, and specifies
completion dates. It is also requiring lead units to prepare detailed
project plans, outlining tasks, time periods, and resource needs. We
did not find similar plans for other missioncritical functions.
In conclusion, while the Health Insurance and Portability and
Accountability Act and the Balanced Budget Act have given HCFA
many tools to tame and police excessive spending and abusive bill-
ing, HCFA appears to be struggling for various reasons to get them
all assembled.
The concern is that while HCFAs responding to implement the
Balanced Budget Act, other parts of Medicare may get only back
burner attentionwhich they can ill afford. We believe that a de-
tailed strategy that involves not just a planning document, but an
approach that encompasses an ongoing process of focusing on objec-
tives and priorities similar to what the agency has undertaken
with respect to the Balanced Budget Act is a key first step in pre-
paring for the next century.
Mr. Chairman, that concludes my statement, and Ill be happy to
answer any questions you or members of the subcommittee have.
[The prepared statement follows:]
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Chairman THOMAS. Thank you very much. And I would once

again refer members to the written statement. Although the oral
one clearly covered key areas, theres still some very valuable infor-
mation in the written statement.
Just to put in context, your statement that the work force has
turned over 40 percent in the last 5 years, I have another hat I
wear around here, which is the Joint Committee on the Library,
and were working with the Library of Congress because of the in-
ordinate number of staff that will be retiring. And its just one of
those anomalies of when you were hired, and how long you worked,
and who was leaving at the same time.
Is this 40 percent turnover in the last five years similar anom-
aly? That is people who have been there for a period of time, the
agency was created, they started, theyve reached the end of their
employment. You used the phrase turnover, which could mean
disgruntled employees, lack of morale, uninteresting work, failure
to recognize achievement. Or it could be that folks started in the
program and are leaving because theyre retiring.
Mr. SCANLON. Its a combination of factors. One is the problem
that the agency in some respects is graying. The Medicare pro-
gram, as you know, is 33 years old, and many people who began
their careers at HCFA or its predecessor working with the Medi-
care program have reached the point of retirement. Managers ex-
pressed to us the concern that thats going to even become a more
pronounced problem in the near future; more senior experience per-
sonnel will be leaving the agency because theyve reached retire-
ment age.
In addition, there are concerns about morale. How much that
contributed to turnover, we could not assess. But there are con-
cerns that the workload is considerable, the ability to reward em-
ployees and to recognize employees has some limitations, and that
in that context you rely upon the dedication of employees to ensure
that work is completed in a timely and effective way.
Chairman THOMAS. Well, your operation is none like that. Youve
got to make sure that quality work is produced, and theres always
a deadline, which creates difficulties, and you have management
problems.
What do you do in terms of rating folks? Do you have a pass/fail
system?
Mr. SCANLON. We dont have a pass/fail system. We still have a
system that maintains different categories of performance, and we
also do not look at a person overall, we
Chairman THOMAS. How am I suppose to take the context you
still have? Does that mean that youre
Mr. SCANLON. Well, Im sorry.
Chairman THOMAS [continuing]. Youre going to change?
Mr. SCANLON. No.
Chairman THOMAS. Okay.
Mr. SCANLON. Though I would say that in looking at personnel
practices, our General Government Division group has identified
that a number of private sector firms have switched to pass/fail
systems. But I think theres an issue of how your appraisal system
fits into your overall reward and incentive structure.
 55

GAO has a system where we do have categories of performance,

and we look at different dimensions of performance, so theres not
a summary judgment, but theres some sense of a report card for
performing. Theres also a very careful examination of individuals
contributions to the work of the agency. And both of those things
play a major role in determining the rewards that individuals re-
ceive because of their performance. And I think thats the key, is
that you have to take the overall picture into account.
Chairman THOMAS. Well, lets go back then to your general state-
ments about HCFA, and then the overall picture. Does their ability
to recognize extraordinary work or excellent work, and reward for
thatdoes that system tend to allow them to do that or does it in-
hibit their ability to do that?
Mr. SCANLON. We heard from a number of managers that there
was difficulty in terms of recognizing outstanding work in a very
visible, tangible way. While managers may reinforce the fact that
individuals are excellent producers, the system doesnt necessarily
make it easy to reinforce that.
HCFA does provide bonuses, but the bonus systemthe amount
of money in the bonus system is relatively limited, and the process
for awarding bonuses involves a relatively deliberate process that
interferes, in many managers minds, with their flexibility of being
able to respond quickly, and to identify that someones performance
was really outstanding.
Chairman THOMAS. What about peer group recognition or aware-
ness? Is there a general understanding among people who would be
considered peers, that people who do good work get recognized and
move forward, or is there an understanding that there are people
who dont do much at all still get moved forward as well, either in
remuneration or otherwise?
Mr. SCANLON. Within HCFAs career ladder, which you have
grades 5 through 12, there was concern that with the pass/fail sys-
tem and the other personnel rules, there was considerable amount
of sort of movement forward on a regular basis. And while most of
that movement
Chairman THOMAS. Regardless of performance?
Mr. SCANLON. Well, we couldnt assess how much might be re-
gardless of performance. The concern was expressed that some may
be regardless of performance, which would impact on the morale of
others.
Chairman THOMAS. You heard the discussion between the doctor
and myself about Congress ability to track where inside the execu-
tive branch approval of various materials that Congress has re-
quested are approved, and there is a multifaceted approval struc-
ture.
Is that because they dont have an internal tracking system?
Should we try to make it more transparent? Her indication was
maybe we should try to get it to OMB sooner. That creates a whole
series of questions about how do they track stuff inside; what is the
procedure.
What did you find about the ability to, at any time, no where
they are, where they need to be? Tracking programs, deadline man-
agement, that sort of thing. What do they look like inside?
 56

Mr. SCANLON. Knowing your interest specifically in congressional

reports, we sought information about both what reports they had
to provide you, and their status as well as their systems for track-
ing such reports. And what we found is that the information is not
systematically available. And despite our efforts to get that infor-
mation from various parts of the agency, we were not successful in
doing that.
We do understand that there may be some information of that
type in some offices, but its not known at a senior management
level where you would like it to be known widely, so that senior
management could accept responsibility for ensuring reports get to
you in a timely way.
Chairman THOMAS. Well, since your job is to critique others, my
assumption is you have a tracking program in place, and it would
be used as a model for others?
Mr. SCANLON. Well, we have a tracking program, and we think
that it does an effective job. There is a great deal of accountability
within the General Accounting Office, in the sense that every piece
of correspondence or request that comes from the Congress is
tracked. Its immediately logged in and assigned to a unit within
GAO, and then that unit is responsible for ensuring that the re-
quest is dealt with appropriately, and the tracking system is up-
dated to reflect that we have taken appropriate actions.
And I can tell you that management above me is constantly ask-
ing about what is happening in terms of anything that is out of
place with respect to jobs that are assigned to us.
Chairman THOMAS. As we continue to request various agencies
and departments to make change, although your model may not be
the appropriate one because of size, or scale, or content, if were
going to critique, weve got to provide options or clear real world
options available to these folk. And frankly, this is an area that Im
going to ask you to continue to look at.
Its one thing to simply say you dont have a good system; its an-
other to try to provide them with some guidelines as to where they
can go, or at least some options. And if they dont follow the op-
tions, they should have a good reason as to why they dont.
So I appreciate very much what youve done for us in a relatively
brief period of time, and look forward to visiting with you once
again.
Mr. SCANLON. Thank you, Mr. Chairman. Well be happy to fol-
low up on that as well.
Chairman THOMAS. Does the gentleman from California wish to
inquire?
Mr. STARK. Whats your turnover rate in recent years at GAO?
Mr. SCANLON. Right. GAOs turnover is really not something that
would be useful to compare at this point in time, because GAO has
undergone a significant downsizing over the last five years. And so
we have had a number of buyouts and early outs, and we have not
done any hiring for about a six-year period.
So, I dont know the answer in numerical terms, but if I did, Im
not sure it would be a useful comparison.
Mr. STARK. Twenty-five, 30 percent, maybe?
Mr. SCANLON. Well
 57

Mr. STARK. Its not relevant. As you say, it may not be

relevant
Mr. SCANLON. If you deal with it in terms of people leaving, its
much harder than that, because weve gone from an agency that
was 5,300 people to an agency thats 3,200 people.
Mr. STARK. Let me go over some math with you, and see if I can
get you to start an audit.
We used to have AAPCCs average county payments. It would be
within your province to audit how we calculate those county pay-
ments, right?
Mr. SCANLON. Right.
Mr. STARK. Try this. Somebody has suggested that theres around
14 percent incorrect payments; some of its fraud, some of its just
mistakes. But we are overpaying in the whole Medicare system by
14 percent, right? Have you heard that?
So, take a county where were paying $3,000 as the county pay-
ment, what we used to call the AAPCC. The government pays 95
percent of that rate which would be a payment of $2850, right? If
my math is right.
Mr. SCANLON. Thats correct.
Mr. STARK. Wait a minute. If you all were doing your job, youd
knock 14 percent out of that $3,000. Because why should we pay
the HMO 95 percent of that 14 percent thats fraudulent payment?
You follow where Im going? And therefore, my contention is that
we are overpaying the managed care plans in each of these areas,
regardless of what you think about the 95 percent. By my
cakulation, the payment would be reduced to $2,550. Wed be sav-
ing about $300 a patient if we just took out the fraud and abuse.
Could you review that for me in terms of what the law says we
ought to pay, and what do we account in there for this fraud and
abuse? It may be that a simple reinterpretation of the present law,
based on whatever you can certify is fraudulent overpayment,
would reduce our managed care payments substantially.
Mr. SCANLON. Wed be happy to look into that, both from a legal
perspective, and I think theres also a question of the potential im-
pact. Because fraud and abuse, at a 13 or 14 percent rate, which
was identified in the Inspector General study, represents a na-
tional rate. And we know from our prior work that there are very
great differences in the incidence of fraud and abuse in different
areas of the country.
So in terms of the equity that one would want do in adjusting
payments, we need to think about how to take that into account.
Mr. STARK. Oh, I have no quarrel with how you take it into ac-
count, but its a big enough chunk that it ought not to be ignored.
Mr. SCANLON. It certainlyIm sorry.
Mr. STARK. Yes. And so to the extent that you could shed some
light on that, it would be helpful. Id like a comparison among
counties. For instances, in Minneapolis the AAPCS is $3,000. In
Miami, its $8,000. If you reduce 14 percent of $8,000, youre get-
ting up to thousands of dollars that weve overcalculated for the
payment of managed care. It is arguable that in a capitated system
there isnt any room for fraud and abuse. We just pay them that
fee, and its up to the managed care plan to do as best they can.
If they have fraud and abuse, its their worry. The Government
 58

shouldnt be financially compensating them that. It certainly is

something I hope youll look into.
Mr. SCANLON. We can look into it. The other thing I would no-
tice, that in the 14 percent its important also to remember that the
basis for that is really inappropriate payments, not just fraud and
abuse.
Mr. STARK. No. I said that at the beginning, Doctor.
Mr. SCANLON. Right.
Mr. STARK. Im not suggesting its all theft, but even if its an in-
appropriate payment, that doesnt happen in managed care. Its a
monthly capitated rate, and if we calculate that rate, knowing that
there are inappropriate payments in the fee-for-service community,
we are overpaying the capitated rate. Youre right on target.
Mr. SCANLON. I was just going to add though that a significant
number of the inappropriate payments were due to a lack of docu-
mentation documentation that might be provided if there were
greater effort.
Mr. STARK. Again, no quarrel as to why. Im not finding fault
here, Im just trying to deal with the fact that, if you and I agree
that there is overpayment, for whatever reasonsun spots, the
tooth fairy, that is creating an overpayment in the capitated pay-
ment, we shouldnt be paying it. We calculated the payment on the
idea that they should collect a reasonable percentage of what we
spend on health care in a community for managed care. But that
phantom amount for fraud, whatever it isand lets say its 14 per-
cent just for argumentwhether its theft or whether its just en-
tropy, we ought not to be including that.
Please
Mr. SCANLON. We will look into it.
Mr. STARK [continuing]. Please give me some background on how
those things are calculated, it would be helpful to the committee.
[The information was not available at the time of printing].
Mr. STARK. Thank you, Mr. Chairman.
Chairman THOMAS. Certainly. Does the gentleman from Lou-
isiana wish to inquire?
Mr. MCCRERY. Thank you, Mr. Chairman. Just a note about Mr.
Starks line of questioning. The law does require, I believe, one-
third of the managed care plans to be audited, if you will, every
year; and if they are found to be charging more than the cost plus
a reasonable amount, they are required to give more benefits. We
dont cut the premiums that we pay, we require them to give more
benefits. So we are looking at that already in the law.
Dr. Scanlon, have you had an opportunity to examine the work-
at-home policies of HCFA? And if so, I have been told that HCFA
management is currently considering expanding their work-at-
home policy to a much greater number of employees.
Are you aware of that, and can you give us any opinion on that?
Mr. SCANLON. We are aware that the agency is in the process
now of considering the inclusion of central office staff under the ar-
rangement of flexi-place or kind of a telecommunicating, where
there would be some work allowed at home. Within the regional of-
fices this has been true in the past, but theres been great dif-
ferences in the share of employees in those offices that have been
participating in these kinds of arrangements, from a very, very
 59

small number in some regions, to a more significant number, but

still a much modest fraction in other areas.
Weve also heard from managers about the flexi-time arrange-
ments, which allow individuals to adjust their work schedule in
terms of time of reporting: for example, whether they would work
five days within a week, four 10-hour days within a week, or over
a two-week period arrange their days differently than doing 10
days and two weeks.
There were some concerns expressed on the part of managers
about the potential interference with needed work that the flexi-
time arrangement may introduce, in that there was not an oppor-
tunity for people to have critical meetings because of certain indi-
viduals not being available.
In looking at this at other agencies and as well within GAO, the
issue is one where these policies by themselves may be fine. The
issue is managerial use of these policies. In both cases, flexi-place
and flexi-time, there is a requirement for managerial approval of
an arrangement. And a manager needs to consider the needs of the
agency in terms of what arrangements can be approved or should
be approved.
Mr. MCCRERY. But right now, I think in GAO and HCFA as well,
the work-at-home policies apply to very few of the staff, mainly
professional employees, Ph.D.s that might need to do a lot of read-
ing at home, you know, things like that. And as I understand the
proposal at HCFA, its going to be much broader than that. It will
apply to just general staff in HCFA. Is that correct?
Mr. SCANLON. Let me ask Ms. Aronovitz, who did more of the
interviewingor who did all of the interviewing up in Baltimore,
to respond to this.
Mr. MCCRERY. Please.
Ms. ARONOVITZ. We heard that this is a provision thats under
negotiation with the union right now. We dont know specifically
how the provision will read. One of the concerns that the managers
said, was that if in fact they had final judgment about whether
somebody could work at home, then they wouldnt be quite as con-
cerned, because there are occasions when, as you say, if there are
proposals that need to be read, there are certain occasions when
its very conducive to working outside of the office.
The managers were concerned that they would not have the ulti-
mate control in approving these, and that is a concern that is still
unsettled in the negotiation process. So were not sure yet how
thats going to work out.
Mr. MCCRERY. Whats your opinion of such a policy?
Ms. ARONOVITZ. We really support flexi-place, to the extent that
it furthers the goals of the organization. But its very important
that theres a very strong balance between the individuals needs
and the needs of the organization, and the organization absolutely
has to be considered. And where its not, then we would have con-
cerns.
Mr. MCCRERY. So what does that mean? Does that mean man-
agers ought to have the final say or
Ms. ARONOVITZ. The policies are set up in a way to make sure
that when people work at home its only to further the needs of the
 60

organization, that is, in instances where, if they couldnt work at

home, they wouldnt be able to be doing work at all.
Mr. MCCRERY. Yes, that makes sense. But are you telling me
that managers then within the organization ought to have the say
so on who gets work at home, or flex time, or whatever, and make
sure that they do have work that they can do at home, and that
the work that they do complements the overall goal of the agency?
Ms. ARONOVITZ. Yes.
Mr. MCCRERY. Thank you.
Chairman THOMAS. No other member of the subcommittee wish-
es to inquire?
The gentleman from Louisiana, Mr. Cooksey.
Mr. COOKSEY. Thank you, Mr. Chairman.
The direction of my questions is about information systems. And
my concern is that yours may be inadequate and can it be im-
proved.
Prior to my joining this august body, I understand that there
was a time when the people on the other side of the aisle were run-
ning Congress; they ran Congress withthe business of Congress
with pen and paper, and a ledger book, presumably because thats
the way itd been done the previous 200 years. If my memory is
correct, there were even some fraud and abuse in the banking
Congress bank and their post office, but I cant really remember
that in detail. But they had no information system. It was only
after 1995 and eight-month transition, that they put Congress
business on an information system, on computers.
I have the feeling that probably HCFAs information systems
could be modernized, updated to eliminate some fraud and abuse.
What have your plans been? What would the cost be? And what
would the timeline be?
Mr. SCANLON. We would agree with you wholeheartedly. In look-
ing in the past, one of the real tragedies of the Medicare trans-
action system effort was that there was a real need for improving
the management of information produced by HCFAs claims proc-
essing systems. Because a share of the fraud and abusethe share
of the dollars that we lose to fraud and abusecomes about be-
cause we are not able to process information as effectively as we
might, given todays technology.
The concern that weve expressed when the Medicare transaction
system effort was underway was that there had not been a com-
prehensive plan, dealing with the kinds of objectives that you just
stated, in terms of identifying the goals for this system, identifying
the essential features that such a system would need in order to
accomplish those goals, setting up a timeline, and identifying the
cost of sort of putting that kind of system in place. Those were not
done well, or at all, with respect to the Medicare transaction sys-
tem. They need to be done with a system that HCFA needs for the
21st century.
At this point in time, our understanding is that HCFA is starting
this process over, though given all the other things that theyre
doing, its not receiving the highest attention; it does not have the
highest priority. But it is something that they are fully aware of,
and that they really needthat they recognize they need to ad-
dress this quickly because it is critical.
 61

The year 2000 problem is something that is of the highest pri-

ority, and is something that is related to the information systems,
but I think that they will have to probably do this in two steps.
One is deal with the year 2000, and then, secondly, design an infor-
mation system that really is the system for the 21st century.
Mr. COOKSEY. Well, Im not worried about the 2000 problem. I
am convinced that some 18- or 23-year-old entrepreneur will come
up with that problem, and will become a billionaire overnight. But
the experience with the IRS has not been very good in developing
an information system. They spentI forget whatseveral billion
dollars, and said, we give up.
The magnitude, the complexity of your problem I would think
would be equal, or your responsibility. Do you think that you could
do a better job in coming up with a system? Or would you do it
yourself, or would you go to the private sector, or what would your
plan be to come up with a better state-of-the-art information sys-
tem?
Mr. SCANLON. Well, this will be HCFAs responsibility, and we
will do the best we can in terms of providing constructive oversight
of how they undertake this.
Its been a task of GAO for a number of years to monitor, not
just for HCFA, but for the agencies of government, the movement
towards improved information systems. And weve done a consider-
able number of reports on those. We can share some of that infor-
mation with you about the principles that weve identified that are
critical to this task.
In some respects theres no one solution, and HCFAs challenge
is certainly unique. Theres an estimate that byor intheir early
21st century they will be paying over a billion claims every year.
In addition to the challenge of dealing with the Medicare Plus
Choice plans, where we would anticipate there will be more than
500 plans, well have a quarter of the beneficiaries in those plans,
and have the freedom to change plans. And the net result will be
that there will be considerable amount of work in tracking enroll-
ments, disenrollments, and payments.
So the challenge isnt perhaps as daunting as the one facing the
IRS. We have established some guidelines as to how agencies may
proceed in pursuing this, and will be happy to share them with
you; but at the same time we do need to wait for HCFA to take
the lead in terms of laying out their initial plans, and then we can
work with them to refine them.
Mr. COOKSEY. I would like to see where you are, if I could have
that information.
One closing question, yes or no answer. Do you think youre
doing a better job of managing your information system and your
business than Congress did before 1995? Youre not doing it on pen
and paper, are you?
Mr. SCANLON. Beg your pardon?
Mr. COOKSEY. Youre not managing it with pen and paper?
Mr. SCANLON. We are not managing with pen and paper. So I
guess then the answer is yes.
Mr. COOKSEY. You can get out without answering it.
Thank you, Mr. Chairman.
 62

Chairman THOMAS. Thank you very much. Thank you very much
Dr. Scanlon, Ms. Aronovitz. No additional questions. Well be call-
ing on your expertise and your organization in the near future.
Last panel for today: Stuart Butler, whos obviously been before
us in the pastwe look forward to his testimonythe Heritage
Foundation. Dr. Paul Ginsburg. And its pleasant to find out that
other folk whove been studying the concerns that we have as well,
if not in direct context, at least in a general context, that Dr. Mi-
chael Gluck, National Academy of Social Insurance, and Marion
Lewin, who was the study director of a Committee on Choice and
Managed Care, Institute of Medicine.
I want to thank all of you for coming. Your written testimony
will be made a part of the record, and you can address us in your
timeframe as you see fit. And well start with Dr. Butler. Thank
you.
STATEMENT OF STUART BUTLER, VICE PRESIDENT, DOMES-
TIC AND ECONOMIC POLICY STUDIES, THE HERITAGE FOUN-
DATION
Mr. BUTLER. Thank you, Mr. Chairman.
Congress last year enacted a series of reforms that modernized
Medicare, as you mentioned in your opening statement. If HCFA
is to carry out its new role under these reforms, it must respond
to two challenges. It must be able to organize a market of com-
peting health plans and provide the information necessary for
beneficiaries to make wise choices within that market; and it must
make the traditional fee-for-service system a more effective compet-
itor to managed care and other private plans that are available
now to beneficiaries.
Broad economic and managerial principles would suggest two key
strategies are needed to respond to these challenges. First, the
management of the market of competing plans and the provisions
of information to consumers must be completely separate from the
operation of any particular plan. That is a very basic principle of
economic organization in a market. Those responsible for setting
the rules of competition, and for providing consumers with dis-
passionate information on rival products, should have neither an
interest in promoting any particular product, nor even the close re-
lationship with one of the competitors. That is why umpires in
baseball do not own baseball teams. But HCFA today carries out
both of these conflicting functions.
Second, the managers of an in-house government plan in a com-
petitive market should be given wide latitude to introduce innova-
tions in organization and marketing. But today, as I note in my
testimony, there are several obstacles that frustrate efforts by
HCFA managers and staff to make the traditional fee-for-service
plan more competitive and better attuned to the customer needs
and desires.
With this in mind, I believe Congress should make two major or-
ganizational changes in Medicare. One, Congress should create a
Medicare Board responsible directly to the secretary of HHS. In ef-
fect, Congress should create within HHS a body that is the func-
tional equivalent of the Office of Personnel Management within the
FEHBP. The function of this body and the focus of the staff within
 63

it should be to organize and operate the market of competing plans,

including the traditional fee-for-service plan; and to provide Medi-
care beneficiaries with the information they need to make the
wisest choice possible. The board and its personnel should be sepa-
rated completely from the personnel running the fee-for-service
plan.
This step would effectively split HCFA into two separate agen-
cies within HHS. One agency would set the rules of competition in
Medicare, act as an umpire, and help beneficiaries make choices.
The other, among other tasks, would run the fee-for-service plan,
competing in that market. I suggest in my testimony how such a
board should be structured.
The second step: Congress should give managers of the fee-for-
service program greater discretion to be innovative and to modify
benefits. It will continue to be difficult for HCFA to modify the fee-
for-service benefits gradually in order to make them more competi-
tive and modern, as long as Congress micromanages virtually all
organizational and benefits decisions. On the other hand, as long
as the fee-for-service plan is to be a benchmark standard plan
available everywhere, Congress must have the ultimate control
over the benefits package.
I would suggest that Congress resolve this dilemma by requiring
HCFA to propose annual modifications in the fee-for-service bene-
fits package, and that Congress restricts itself to an up-or-down
date vote on the proposed benefit changes as a whole.
To improve this process further, Congress could designate a
standard benefits commission within HCFA, with commission
members selected for fixed terms by Congress. This commission
would make the detailed benefit proposals to be considered by Con-
gress.
Structural changes of the kind Ive suggested should of course be
considered very carefully and enacted slowly. In the meantime, I
believe Congress should make some changes now to improve the or-
ganization of Medicare that will also help evaluate the probable ef-
fects of larger changes. And I mentioned those in my testimony,
Mr. Chairman.
[The prepared statement follows:]
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Chairman THOMAS. Thank you very much, Stuart.

Dr. Ginsburg.
STATEMENT OF PAUL GINSBURG, PH.D., CHAIR, STUDY PANEL
ON FEE-FOR-SERVICE MEDICARE, NATIONAL ACADEMY OF
SOCIAL INSURANCE AND PRESIDENT, CENTER FOR STUDY-
ING HEALTH SYSTEM CHANGE.
Mr. GINSBURG. Thank you, Mr. Chairman.
I am appearing as chair of an expert panel convened by the Na-
tional Academy of Social Insurance, and am accompanied by Acad-
emy staff director, Michael Gluck. This panels outstanding mem-
ber have depth of experience in Medicare, private health plans, and
health care delivery. And many have extensive experience in both
government and the private sector.
The panels report, From a Generation Behind to a Generation
Ahead: Transforming Traditional Medicare, is being released
today, and my testimony is drawn from that report.
Even if Medicare+Choice develops rapidly, large numbers of
beneficiaries will continue in the fee-for-service Medicare program
for the foreseeable future. The structure of this program has
changed little since 1965; its essence is to pay bills. While the Con-
gress has accomplished a great deal in the 1980s in mechanisms
for setting payment rates, little has happened to encourage more
effective delivery of services to beneficiaries.
There are opportunities to improve quality and reduce program
costs, especially for those beneficiaries with chronic illness. Leading
private insurance plans have increased their activities to manage
care over the past ten years, but Medicare has not followed.
A number of management tools used in the private sector hold
promise for Medicare; these include disease and case management,
incentives to use selected providers and competitive procurements.
We cannot say at this point precisely which tools will be most ef-
fective in fee-for-service Medicare. HCFA needs to test the poten-
tial of such tools and to encourage broader use of those that are
successful. The limited progress in this area is not because of lack
of interest by the leadership of HCFA, but rather, the substantial
barriers to HCFA performing this role; the Congress tends to allow
little latitude to innovate; and HCFA does not have the authority
to integrate successful demonstrations into the regular Medicare
program.
The Congress has begun to reduce barriers. Provisions in the
Balanced Budget Act and in the Health Insurance Portability and
Accountability Act move in this direction, but I would characterize
these steps as reflecting innovation by exception. A more com-
prehensive approach is needed. HCFA needs a broad mandate to
pursue ongoing improvement in fee-for-service Medicare by incor-
porating effective care management tools.
The Panel made specific recommendations. First, the Congress
should mandate fee-for-service Medicare to move beyond its tradi-
tional role as a billpayer and take responsibility for quality and
cost of care. Second, the Congress should direct HCFA to promote
innovations in Medicare fee-for-service by adapting the best prac-
tices of private health plans to this program environment. These
innovations should be targeted toward those geographic areas and
 76

populations where they could be most effective. Third, to carry out

these innovations, HCFA should have the authority to waive some
statutory requirements and should be able to contract with a vari-
ety of qualified private organizations that specialize in particular
services, such as patient education, case management, or utiliza-
tion review.
Along with this additional authority, accountability should be de-
manded. The Secretary of HHS should report annually to Congress
on how HCFA has used its authority to innovate, and what the re-
sults are. Congress should designate an advisory body, such as the
Medicare Payment Advisory Commission, to review this report.
In conclusion, to advance the quality of care for Medicares fee-
for-service beneficiaries and to ensure that taxpayers money is
well spent, HCFA must have modern management tools at its dis-
posal. In managing fee-for-service Medicare, HCFA should have the
capacity to apply new knowledge from research and the private sec-
tor about how best to manage health benefits for older Americans
and those with disabilities, especially as the number of bene-
ficiaries living with chronic conditions continues to grow.
Thank you, Mr. Chairman.
[The prepared statement follows:]
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Chairman THOMAS. Thank you, Dr. Ginsburg.

Ms. Lewin.
STATEMENT OF MARION E. LEWIN, M.A., STUDY DIRECTOR,
COMMITTEE ON CHOICE AND MANAGED CARE, INSTITUTE
OF MEDICINE
Ms. LEWIN. Mr. Chairman, Mr. Stark, and members of the com-
mittee, Im very pleased to be here today, on behalf of the IOM
Committee on Choice and Managed Care, and my remarks are
based on their report. The list of the members of that committee
and their recommendations are attached to the testimony.
Before I provide my few comments on this very important topic
of todays discussion, I want to provide some important clarifying
information. One is that the report that we did came out in August
1996, before the passage of the Balanced Budget Act of 1997. Sec-
ond, the committee was mandated to look primarily at how to make
the Medicare Choice system more accountable, and to improve in-
formed purchasing by and on behalf of beneficiaries. It was not
given a specific mandate to look at the organization of HCFA, but
clearly as we went through our work, the organization of HCFA
and the role of HCFA did become an important topic. But only one
of the studys seven recommendations pertains to HCFA, and re-
garding that recommendation the committee made the following
points.
It said that, if we want to make the Medicare market more ac-
countable, trustworthy, and assuring for Medicare beneficiaries,
there were some concerns about HCFA; that administration of a
market-oriented multiple choice program and the management of
the traditional Medicare program involved very different corporate
culture and missions; that the two functions require different types
of management, staff expertise, orientation, and knowledge. And
the committee spoke to the benefit of HCFA recruiting staff and
senior managers with extensive experience in managing the var-
ious aspects of multiple choice in the private sector. Then also that
a flexible response mode to changing conditions and opportunities
is required for the effective management of a multiple choice mar-
ket in order to provide the best options for beneficiaries. Such re-
sponsiveness may be hard to achieve with the regulatory con-
straints of HCFA.
As part of its recommendation, the committee suggested an enti-
ty for study, which we call the Medicare Market Board, which has
taken on a life of its own. As the committee was envisioning this
Medicare Market Board, they looked at a model at something like
the Federal Reserve Board. The committee didnt investigate it fur-
ther. We didnt have specific experts on the committee on public
administration and organizational management. But they felt that
a Medicare Market Board should have the stature, leadership and
resources to hold plans accountable, and to be a dispassionate de-
veloper of the rules of the game.
Since the publication of our report, I think the committee be-
lieves and the committee is now doing some continuing activities,
that HCFA has made some impressive strides to more capably and
effectively administer this complex and challenging world of choice.
The committee is especially heartened by HCFAs new center for
 86

beneficiary services because they are undertaking or implementing

many of the other recommendations we made in the report, and is
also applauding the establishment of the Center for Health Plans
and Providers, which does include many, if not all of the elements
and responsibilities that we have envisioned under the Medicare
Market Board.
I think that the major difference is that as some of the other wit-
nesses have said, that the committee felt that there really needs
to be a fire wall between the choice plans and the fee-for-service.
Even on our committee, we had representatives from the fee-for-
service world and representatives from the new managed care
world. There was a tension. The people from the managed care
world really didnt want fee-for-service to succeed. They didnt real-
ly want it to be improved because it would compete with them.
So I think there is a feeling that if in a large self insurance plan,
which you could really think of as Medicare, you do need a fire wall
between people who are managing and administering the competi-
tive choice plan and the ones that are managing the fee-for-service.
As part of our committees work, we heard a lot of testimony
from model purchasers, the people that we feel are doing it right,
that are the leaders in this arena. I do want to share with you that
certain themes and cautions from these purchasers, from these
plans, from these States, from these organizations, were heard
again and again, both in the commission papers and in our hear-
ings. That is, that doing it right requires a real commitment of
staff, talent, time, technology, and resources in order for these kind
of strategies to have a real payoff. It can not be done on the cheap.
I think the lack of resources is a real detriment and a problem for
HCFA as it has been given these major, major new responsibilities.
Why dont I end here so that we can allow time for discussion.
Thank you.
[The prepared statement follows:]
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Chairman THOMAS. Thank you very much, Ms. Lewin. I under-

stand that your study and book came out prior to the BBA being
passed, but HCFA reorganized itself prior to the BBA passing as
well. I read with note on page 107 of your book, and you indicated
in your testimony, that the administration of multiple choice pro-
grams and the management of the traditional Medicare programs
evolved very different missions and orientations. But in your testi-
mony, you indicated that you believe HCFA has made impressive
strides to deal with this.
Was the reorganization of HCFA, notwithstanding it occurred
prior to the BBA, the direction that you think they should be
going? Or should it be more in the direction of I think probably to
use Butlers position as a kind of a guidepost, that in fact bringing
the two together, the fee-for-service and managed care, may not be
the right direction. You indicated they clearly deal with things dif-
ferently. Where are you on the fire wall? I dont think you con-
tradict yourself, but I am a little concerned about your praise of
HCFA and the point you made in the book.
Ms. LEWIN. Okay. Let me try to clarify that. First of all, in terms
of HCFAs reorganization, we do feel that the Center for Bene-
ficiary Services is certainly a step in the right direction. Our other
recommendations about how to develop an infrastructure for infor-
mation for Medicare beneficiaries and what is needed, many of
these are now the priorities for the Center for Beneficiary Services,
whether they can truly implement that ambitious agenda with lim-
ited resources of course
Chairman THOMAS. But we were very concerned about that. We
are going to monitor the resources. But that is more of an informa-
tional, relational. I am concerned about the structural change of in
essence taking the whole managed care program that was outside
the house or maybe in the garage, and bringing it, integrating it
into the overall structure. Not the end work product of some areas
that are beginning to understand belatedly the beneficiary is a cus-
tomer and they need information.
Ms. LEWIN. Well, let me just say that the Medicare Market
Board, we were clear that we felt that there should be a dis-
passionate group that would set the rules for the game for both
managed care and fee-for-service. Then the second level is how you
actually contract with plans. We felt that it even could be under
the Medicare Market Board, but at some level, there had to be a
fire wall between the people who administer the one part of Medi-
care and the other. The committee stopped short in terms of mak-
ing a final recommendation, because we really didnt feel that we
had the expertise and the time, this was a very short-term report,
to actually develop the details of how that should be done.
There is a potential of a Medicare Market Board building some
kind of a fire wall even in one organization. I mean it certainly has
been done. But we are not able to supply the details.
Chairman THOMAS. Stuart, obviously your approach is that with
your number of analogies, that you really shouldnt be doing two
in the same shop. What is your assessment of the reorganization
that HCFA carried out, a help or hindrance to moving in the direc-
tion that
 111

Mr. BUTLER. Well, as Marion Lewin pointed out, some of the

functions that would have to be under some kind of marketing
board have been developed. There is an intent at HCFA to try to
do this. However, no reorganization within the current structure
can achieve what you really want to achieve because its an issue
of a culture. Its an issue of the skills that are involved. It is also
an issue of keeping people apart from each other. Keep the umpires
away from the players. This is absolutely crucial for Medicare to
be successful. As Ms. Lewin pointed out, within her committee, the
whole world can be divided into fee-for-service people and managed
care people, as far as I can see. There is this dichotomy. So I think
that ultimately there must be a revision of the HCFA reorganiza-
tion to separate these functions out, if we are going to see Medicare
work effectively for everybody.
Chairman THOMAS. One of my concerns is that I think in fact
failure to innovate was reinforced by the fact that the fee-for-serv-
ice was structured as the way to operate. One of the reasons we
are lagging behind now is that its the Governments structure and
not a flexible one that can change with the marketplace. I think
maybe skilled nursing facilities were invented by Government pay-
ment structures. My very real concern is that what we are talking
about a fire wall between fee-for-service and managed care, and we
are beginning to think that theres this bifurcated world or that
this is the way things are, I am worried that we are going to stifle
innovation in that regard and that we have got to create the max-
imum opportunity for innovation. Those were the various programs
we had. To the degree that bureaucracy locks itself into a certain
pattern now, it inhibits the change that I think needs to take place.
So I am very much concerned about anybody saying that there is
this bipolar world in terms of an approach. I am trying to figure
out a way to deal with it in multiple ways.
The other concern I have, both in terms of Dr. Ginsburg and Im
sorry to say, Dr. Butler, you as well, if we are going to run a de-
fined benefits world, I can assure you, we aint going to let those
folk make the decisions in the general sense or for Congress to
judge on a pass/fail basis an overall program.
Now, if you want to talk about shifting to a defined contribution,
where Congress obligation is to pony-up X number of dollars,
then I am more willing to talk about letting the professionals man-
age the packaging and delivery of those dollars to maximize the
benefit both to the beneficiaries, and get the maximum distance out
of your dollars. Now that is a different approach to the way that
you have offered it.
So what is your reaction to moving to a defined contribution
which would maximize HCFAs ability to package and reorganize
and create a comfort level on the part of Congress, because that is
what they are supposed to be doing? We are doing what were
doing. But in a defined benefits world, there is no way you are
going to.
Mr. BUTLER. I agree, as you know, about moving towards a de-
fined contributions system. I think that is ultimately the way to go.
But even if you dont complete that task, I would just make two
observations about the point you made.
 112

First, I would totally agree that we need to have increased flexi-

bility in the way in which the fee-for-service in the system oper-
ates. But second, I think you would also accept that there is clearly
a dilemma in the process we have of trying to set benefits within
a defined benefits system. Because in reality, all kinds of political
pressures come to bear on Congress regarding what services are
provided. Provider organizations are highly influential and press-
ing their cases. One of the problems we have with the Medicare
system is that effect.
Somehow we have got to find a midway position between allow-
ing orderly evolution and yet also having effective Congressional
control over the benefit structure. Thats really what I was getting
at. I dont have a simple answer to it. I just think that somehow
we have got to get away from either complete control by a bureauc-
racy over benefits or by a political process constantly trying to de-
termine how long people should be in hospital and what services
they should be provided in their every circumstance.
Chairman THOMAS. My concern is that to the degree you would
move to your halfway house of an all-or-nothing approach still deal-
ing with defined benefits, the way in which Congress would express
itself unfortunately, Ms. Lewin, would be back to cutting funding
for the support of, the administration of, and then you kind of cre-
ate a built-in guaranteed failure of the halfway house, because the
only way you can get at it is to control the mechanism of delivery
or of review or the rest.
So at some point we have to engage in a fairly fundamental de-
bate about more fundamental changes, not just in the manage-
ment, but in the program itself. We have to be aware of one clearly
affects the other, and not think that we can just play with the
management structure inside HCFA and solve a lot of problems. I
guess what I am saying is this is an ongoing changing process. We
have only begun. Some people think we have finished. I know you
do not. But we will be looking to people like you to give us some
models. I especially have difficulty with a quality group of folk com-
ing together who could provide answers and then say well, we have
decided we cant come up with something. Somebody has got to
walk the plank. I dont think its Congress that should walk the
plank on coming up with specific changed suggestions. We need
you folk as well. But I appreciate what you have done.
The gentleman from California?
Mr. STARK. Thank you, Mr. Chairman.
Dr. Butler, on page 3, you talk about the separation of the man-
agement of the market from the management of any plan. I men-
tioned that in my opening statement. You cant have somebody pro-
moting a product and regulating it. Its like the problems with the
FAA who promote airline travel and at the same time tell airlines
how to operate. Its an inherent conflict of interest.
I would like to bring up another issue. I think you make a strong
case for a problem that I have complained about for some time.
That problem is the National Committee for Quality Assurance and
the Joint Accreditation Committee for Hospitals. Both of those
groups have their boards stacked with people who either operate
or own the very entities that these people are supposed to inves-
tigate on behalf of the Federal Government. My sense has been
 113

that we have got to separate that. We cannot have the fox in the
hen house. Does that comport with your concerns? If we are going
to contract with outside groups, basically private groups, to do
quality investigations for us, there should just be an absolute pro-
hibition between any contact with that company and the people
that are investigating.
Mr. BUTLER. Im not an authority on the structure NCQA, so I
would hesitate to talk in detail about that. I would say that your
general principle is one I would agree with as a general matter,
namely that for those who set the rules of the game that will affect
any particular player should, at the very least, any involvement
should be very explicit and clear and taken into account. Ideally,
the people involved should not have a direct interest in the out-
come of any of those decisions, I think as a general principle.
Now there is also of course the issue of an advisory role. It
makes a lot of sense to have people who are practical players in
a field to give advice and to make recommendations and so on. But
that can be separated from the ultimate authority of who makes
the decision.
Mr. STARK. Thank you. I, by the way, just as a sidebar, like your
idea of a board to manage the Medicare managed care plan. I
would love to discuss that with you further at some other time. I
think we have to do something in that area.
Either Dr. Gluck, or Paul Ginsburg, could respond to this. We
now reimburse virtually any hospital that wants to conduct a
transplant operation, even though common wisdom would suggest
that those centers which do many more procedures have far better
outcomes.
Would you all support giving HCFA the authority to narrow the
number of facilities for certain complex procedures so that we con-
centrate experience? I hate to use the words centers of excellence,
because Im not sure how you define that. But, these centers that
have more experience, would we not be doing a service by giving
HCFA the authority to direct patients to them?
Mr. GLUCK. The study panel spent a fair amount of time looking
at the examples from private health insurance, in which patients
are steered toward those providers that do better in cost and qual-
ity outcomes. The panel was struck by that, and it certainly in-
forms their recommendations. They didnt get into a lot of the spe-
cifics about exactly how that would be done.
Mr. GINSBURG. Clearly, one of the innovations that we can imag-
ine would be HCFA identifying for beneficiaries the best transplant
providers and were contracting with them. We did not discuss
whether the ones that do not make that cut should not be in the
program or they shall just hold non-preferred status. But it clearly
is in the programs interest to steer beneficiaries toward more effec-
tive providers.
Mr. STARK. You also talk about the practice patterns that are
identified in the Dartmouth Atlas. Somebody recently indicated
I think it was Uwe Reinhardt in his Christmas cardthat a proce-
dure that costs $8,000 fees in Miami is only $3,000 in Minneapolis.
Now I have a plan to contract with Northwest Airlines. We could
do a lot of flying people back and forth from Miami to Minneapolis
and save a lot of money, it seems to me, in between. But all I have
 114

been able to find is that these huge differences in the cost of care
where the outcomes dont reflectthe cost, is tradition. These dif-
ferences are habit. They are a whole host of things which Im not
sure Congress can control.
But I would hope that you could help us in finding some way
that we could begin to move toward some national standards. With
two and a half and three times a difference for the same proce-
dures with equally highly qualified and well-trained providers, we
are going to have a problem that is just going to intensify if we
cant figure out a way tolevel that out.
Mr. GINSBURG. Yes, these variations demonstrate the potential
for saving money and improving quality by moving beneficiaries to-
wards where the best care is delivered. A number of implications
for the Pands ideas come up. One is that if a certain procedure
costs $8,000 in Miami and $3,000 in Minneapolis, we should con-
centrate our efforts improving its delivery in Miami, but not in
Minneapolis, because I wouldnt rule out a Medicare program to
provide an option for beneficiaries to travel to a facility that has
a contract with HCFA to provide these services on the basis of its
quality and cost.
Mr. STARK. The airlines will be after us. Thank you, Mr. Chair-
man.
Chairman THOMAS. Just briefly along that line, I think its fairly
easy to talk about the best move to quality and the rest. The dif-
ficulty I have is coming up with a really objective way to measure
some of that. The best way I know is to collect the data statis-
tically, create outcomes, compare outcomes for dollar spent, and
begin to structure it in a way that allows you to at least define
quality in a relative sense. Especially to determine what you get
for your dollar. And then create some positive guidelines.
I have a very real concern, this is slightly off the mark, but clear-
ly an issue we have to deal with is the ability to gather that infor-
mation, the question of confidentiality, the ability to produce with
clear protections for folk where its appropriate, the material nec-
essary to produce the outcomes research to provide the positive
guidelines given the potential of some legislation which will limit
us. Minnesota has been mentioned several times. Over the break,
I spent some time at the Mayo Clinic talking with them. Their real
concern, for example, the new Minnesota State law in the ability
to collect information. The whole question of information collection
as a matrix for making decisions, both of cost effective and of qual-
ity will be absolutely critical to us to be able to do the kinds of
things you have been discussing. Its an area that all of us have
to deal with because a very simple bill passing will eliminate our
ability to move in a number of directions that would produce qual-
ity medical care at a reasonable cost to taxpayers.
The gentleman from Louisiana?
Mr. MCCRERY. Thank you, Mr. Chairman. Actually, you asked
most of the questions that I was going to ask.
Dr. Butler, if the title of this hearing had been preparing Medi-
care for the 21st century rather than preparing HCFA for the 21st
century, would you have submitted different testimony?
Mr. BUTLER. Well, I would have commented probably on the de-
fined contribution issue, as I have done before. But I think the
 115

structural changes I suggested, whether or not one goes further in

terms of Medicare reform as a whole, are still sound organizational
principles for where we are in the structure of Medicare, which has
been to move from a kind of a one type of benefit structure and op-
eration to a much wider choice. When you have a range of choices
and people have to evaluate them, and plans are in competition
with each other, it forces I think you to look at a structure that
makes sure that people have information; and its honest and dis-
passionate information, which is not possible under the present ar-
rangement.
Mr. MCCRERY. I thought Mr. Thomas criticism of your proposal
was a little unfair, given the constraints of the topic of the hearing.
I wanted to make sure you had the opportunity to say that if you
prepared testimony on the future of Medicare, it might be different
from the 21st century for HCFA.
I happen to agree with the criticisms that Mr. Thomas leveled
at your proposals, as well as some of the others. Even though we
could have a dispassionate board, if thats possible, I dont think by
any stretch of the imagination that Congress, as long as we have
a defined benefit program, is going to hand over to some dis-
passionate board the power to describe and define the benefits.
Even if its on an up or down vote, any time you start taking away
benefits from people, we are going to vote down. Thats just the na-
ture of this beast. Now if you want to add benefits, well vote up.
So I just dont think your proposal is practical from a political
standpoint. I understand where you are trying to go. You are trying
to form some kind of midway stop along the way from where we
are now to a defined contribution. I hope thats what you have in
mind. But I dont think we can do that. I think we have finally
faced the question of whether we have a defined benefit program
or a defined contribution program. We cant go halfway. We have
tried. I mean we have done these little piddling things with choice
and Medicare Plus and all this stuff. Its going to fail, in my view.
We are going to continue to have costs go through the roof and
were going to continue to be the arbiters of what benefits those
managed care plans must provide. So I just dont think that your
proposal is going to get us to where we need to go.
We really ought to just face the question and debate it honestly
and have it out. Then maybe well win and get a defined contribu-
tion system and let the market work. Maybe we should just fold
Medicare into the private healthcare marketplace all together, do
away with Medicare as it exists today and have some sort of Gov-
ernment assistance to everybody for healthcare, from children all
the way up to the most elderly, but let the market be the manager
of the system and not the Government.
Mr. BUTLER. I dont fundamentally disagree with that character-
ization of where we need to go.
Mr. MCCRERY. I would hope not.
Mr. BUTLER. I am doing my best today to look at the current sit-
uation of how to improve it. I think you would agree, I suspect,
that a large group of legislators trying to figure out a comprehen-
sive package of benefits and to make sure that its improved every
year on the basis of best knowledge is not a very good way of doing
it.
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Mr. MCCRERY. Its nuts.

Mr. BUTLER. It may be the only way right now. However, I would
suggest that you look at one of the short-term proposals I made,
which was simply to say let us set up at least an advisory body of
some kind to suggest to Congress.
Mr. MCCRERY. I think thats a swell idea. I hope we do it, but
I dont have high hopes for solving the problems with it.
Does anybody else want to comment?
Ms. LEWIN. I guess I did want to comment in this discussion be-
tween a defined contribution or a defined benefit. I mean that is
a whole different debate. But when this committee did its work, I
think one of the underlying issues, and I know its been overplayed,
is trust in the system. There is now a lack of trust on behalf of
beneficiaries because they feel that the information they get is in-
adequate, its not trustworthy, its not understandable. When we
looked at best practices, like CalPERS, or Pacific Business Group
on Health, and some of the large corporations, when consumers or
patients trust the information and feel that their employer is on
their side but also is interested in providing more cost effective ap-
propriate healthcare, then you can move to a more value-based sys-
tem. But I think when you tell the elderly were going to go to a
defined-contribution without that inherent trust, I think that is a
problem.
Mr. MCCRERY [presiding]. Thats a good point. Obviously if we
went to a defined contribution system, we would have to have some
Government-imposed information availability program so that sen-
iors and everybody else in the healthcare system could make good
choices. Thank you.
I guess Ill assume the chair and call on Mr. Houghton.
Mr. HOUGHTON. I guess Im next. Thank you very much, Mr.
Chairman.
Thank you very much for being our last panel. You have been
very patient. I really would like to ask sort of a broader question
about responsibility here. One of the problems which exists here in
Congress is that we have responsibility and were clearly inter-
ested. There is an enormous amount of money involved. Yet we sort
of dabble in the organizational bit rather than being sort of the
board of directors. One of the questions I would like to ask you, do
you think that the management of HCFA really understands what
we are asking them to do?
Mr. GINSBURG. I can comment on the board of directors role
versus getting into details. I saw this firsthand in my experience
with Medicare physician payment reform, which was very detailed
and technicalfor example, setting relative values and geographic
factors. Congress, as far as I am aware, never engaged in that level
of detail. They set up the overall principle, and HCFA implemented
it and reported how they did it. I believe that Congress didnt get
into the details because the leaders knew if one relative value wa
changed, the members would hear from lobbyists forever to change
the relative value that affects their group. The down side of getting
involved in the details was very clear to them. I think its not as
clear with things like the benefit structure of Medicare.
I can envision Congress learning from the experienceof dealing
with detailsconcluding that there are certain areas that it just
 117

should not get into because of the consequences. The Congress

should act more like a board of directors and delegate more to
HCFA. Over the years that I have watched HCFA, it has been very
responsive to the Congress. Some of the biggest problems have
come with interest groups that are narrow focused. They tend to
do do better in Congress than they do in approaching the Executive
Branch. This has caused a lot of the turmoil.
Mr. HOUGHTON. Does anybody else have any comments on that?
Because I think the thrust of my question is really this is an orga-
nizational issue. Obviously, you want to look over the next hill and
see whether HCFA is prepared for some of the dynamics of the
next century. However, the question is, will they really understand
what Congress wants. If they dont, we should tell them. If they do,
I dont know why we have a board of directors, advisory commis-
sions, and things like that. That is up to them. They ought to de-
cide that. I dont know how you feel about this. Maybe Dr. Butler
or Ms. Lewin?
Ms. LEWIN. I think part of it is this whole new world is chal-
lenging for all organizations. When I even think of being employed
at the Institute of Medicine, how many things have changed for us.
I mean the whole world is more market oriented and competitive,
et cetera, et cetera. I think that HCFA is trying very valiantly to
respond, and very responsibly. I mean when you go there, you real-
ly do have a sense that people are working very very hard. I mean
clearly this is a whole different orientation. I think it is a chal-
lenge. I think that is why hearings like this are very good because
you put people on notice that you are watching.
Just to divert a little bit, but I think its relevant, and actually
Im now kind of going in a different direction to what we were dis-
cussing earlier between fee-for-service and managed care. But we
had a lecture at the Institute of Medicine last night which I
thought was very telling, by someone by the name of Arnie
Millstein, on purchasing quality on behalf of purchasers. He cau-
tioned the audience in saying you know, we have gotten too much
in this polarization of fee-for-service versus managed care. What
we really should be looking at is the average American healthcare
and the best healthcare that America has to offer. Whether its fee-
for-service or managed care, that should be our goal.
My feeling is that sometimes were looking at this as fee-for-serv-
ice versus managed care. Whereas both sides, that really should be
their goal, to purchase the best care that America has available.
Mr. BUTLER. Congressman, I think its not only a question of giv-
ing clear direction to an agency and making sure that its senior
management understand that. I think as many of us have said in
different circumstances, that there is a culture of an agency to con-
sider too. It is very difficult to take an agency or a group of people
in the private sector, let alone the public sector, who are very used
to seeing their role in one way and being trained in that way, to
then try to get them to do something else. Divorce lawyers dont
tend to make very good marriage counselors. There are reasons for
that.
Mr. HOUGHTON. I understand that. Ill just interrupt a minute,
and then Ill cut off, Mr. Chairman. But I mean I think sure, condi-
tions change, market changes, demands change, the money
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changes. Thats to keep a monitoring eye on it, not to direct wheth-

er to establish this board or that board or have advisory commit-
tees. I mean thats the operations that have got to do that. Thank
you.
Chairman THOMAS. [presiding] Just let me say, very briefly, be-
cause I know we want to move on, this business about best I just
think has to always be qualified. That is, we are dealing with a
program that at least in the Part B portion is 75 cents subsidized
by the taxpayers. Given the advances of medical science, you have
got to somehow reconcile the public treasury with the medicine
available. People will consumeand this is my friend from Louisi-
anas statement that Ive stolen a long time ago, I figure another
six months and Ill just quit giving you attribution unless you are
herePeople will consume as much healthcare as the people are
willing to pay for. The reason I like moving more toward a defined
contribution, and frankly, discussing as a matter of public policy,
not just for Medicare but a number of other areas, how much we
should be putting in there is that that is what Congress should be
doing, setting the policy and the overall structure. The profes-
sionals ought to be determining how we maximize the return on
that dollar in healthcare we should provide them with the tools to
be able to measure between them far better than we do now. It is
a legitimate and appropriate role for Government, including the
education of the consumer, woefully ignorant now, about their op-
tions and what they have available.
But the innovation, the specifics and the way in which that prod-
uct is delivered should only remain in the private sector because
that is where you get the rapid innovation and the turnaround and
the change. That kind of a blend I think ultimately will bring some
folk who now apparently are on opposite sides but dont realize
that there is an area of common ground.
Obviously, there are a lot of vested interests and sacred cows
that were just shot or slaughtered by that statement that we have
to overcome to go forward, but its something I think we have to
do.
The gentleman from Louisiana for a final question?
Mr. COOKSEY. I am looking here at an earlier edition of National
Journal. There are four Presidents with big ideas and four Presi-
dents with small ideas. I just happened to be in Washington the
summer when I was in medical school, the summer that Medicare
was signed into the law. Lyndon Johnson is not on either side.
My question is, can we step back and look at the big picture?
Can we come up with a plan that is a defined contribution and con-
sider three categories, the people that get their payment from the
Government, the indigent, the Medicare or the Medicaid, the old
veterans like me when I get a little older. Then the people that get
their insurance or their health insurance from their employers. The
third group are individuals who are not in either category, but are
out there maybe as small business women, men, individuals that
dont have any real tie, but have to pay for their insurance. Can
we step back and look at a plan that would be defined contribution,
let the Government pay where they are going to pay, and then let
all the others have full deductibility for their health insurance, and
the employer get out of the health insurance business, and the em-
 119

ployer have no deductibility? Would that be feasible? Do you think

that can be done? Then this would put us back in the marketplace.
I deal with these veterans on my Veterans Affairs Health Sub-
committee. He would have a card and he would go in and pay for
it, but he has got a defined contribution.
Mr. BUTLER. I strongly feel it can be done. I am more than happy
to share with you some of the material that we prepared in the
past suggesting exactly that. You are talking about a combination
of things. First looking at Medicare, at defined contributions to peo-
ple. And second, you are looking at changing the way the tax sys-
tem operates to do two things, to enable people to obtain the means
they need through some kind of refundable credit, and ending this
bias in the current system towards one type of organization for
healthcare for the working population, which is through the place
of employment. This also means looking at the role of other inter-
mediaries to help to pool people together so that you dont have to
go through the employment system. I think that a number of ideas
along these lines should be looked at. It is a continuum.
I think its very important that we have a healthcare system in
this country which is a continuum, whether one is elderly, working
population, or unemployed.
Mr. COOKSEY. Dr. Ginsburg, do you have an opinion?
Mr. GINSBURG. Yes. The major contribution that employers have
made in their provision of health insurance is forming a group in
which everyone or almost everyone is going to be buying insurance.
Of course our tax system has distorted things because theres an
additional incentive to get insurance through employers.
I could see a lot of advantages over the long-term to phasing em-
ployers out of the health insurance area. But what we need to re-
place them with is a strong mechanism to create and govern the
health insurance market. I wouldnt want to have a situation
where everyone bought their health insurance in the individual
market with tax credits because that market has long failed. It has
not well served people who cant get insurance through employers.
So I think that there is an important need, whether you call it
a purchasing coalition or a purchasing cooperative, to have another
entity that people go with their tax credits to find out what quali-
fied plans are available, what the choices are, and what it costs.
I think that would work, but if we dont set that up, then we could
lose a great deal.
Mr. COOKSEY. Ms. Lewin, I liked your term fire wall. I under-
stand that analogy. Do you think it can be done?
Ms. LEWIN. I agree with Paul. First of all, I think everything is
possible. I think a key thing with the defined contribution is of
course where do you set the contribution. If people feel that they
can seek valuable and essential healthcare services, its going to be
more politically acceptable. But I think the problem with the
voucher idea is first of all, at what rate do you set the voucher. But
then also, what is the purchasing capability of people with that
chit. I mean there are some people that will be much more dis-
advantaged.
So I do agree with Paul. I think if you set in and develop also
at the same time an infrastructure, where people can be well-in-
formed about their options and also that they can join various
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groups that will help them purchase more effectively, I mean I

think clearly were moving in that direction, even if we dont say
it. Many of the employers now basically give a defined contribution.
They say this is the rate to buy our standard managed care pack-
age. If you want to buy something else, its out of pocket. So that
I think that defined contribution is a trend that were seeing more
and more. Whether we can make it the major way that we pay for
healthcare services, I think remains an open question.
Mr. GINSBURG. We very much are going toward the defined con-
tribution. In the employer market its getting to that point where
a lot of employees have confidence in their employer that their de-
fined contribution will be enough to enroll in a plan that is ade-
quate. The challenge for making a Medicare-defined contribution
acceptable is to convince the beneficiaries that the contribution will
be set high enough so that a plan that is called acceptable, what-
ever that means, will be available, as opposed to allowing it to
shrivel over time so that more and more personal resources are
going to have to be used to getting a adequate plan.
Mr. BUTLER. If I could just add too, however, that that issue with
the defined contribution is real, but its not unique to the defined
contribution approach. Its also true of a defined benefit. If you say
were going to give you all these benefits, but then you say were
not actually going to pay physicians and hospitals adequately to
provide them, you are in fact reducing the value of the benefit.
So while I agree with that point about the defined contribution,
its not unique to the defined contribution.
Chairman THOMAS. The fundamental problem has been that we
started out with a program rooted in the historical structure of the
cost plus defined benefits. It never ever had the built-in flexibility
to make the kinds of adjustments because your argument is that
people are going to worry about whether or not the plan can ade-
quately cover the benefits that were presented. Had it had enough
flexibility for changing management delivery structures, you could
have maintained a number of benefits at a savings. So its just a
big chicken and egg problem that we have begun to address.
I think, Stuart, you are absolutely right. We can ratchet down
payments to doctors and hospitals and say we have maintained a
defined benefit program. Its just that we have a hollow shell for
benefits and the rest of it.
The concern to me goes back to the basics, how can the taxpayer
get maximum value for the dollar? To me it is in setting a struc-
ture which gets us more out of it, more into a policy, and create
a degree of flexibility that whatever it is that we are able to de-
liver, its the best that we can deliver for the dollar amounts, rath-
er than talking about everybody in the U.S. gets the best medicine
available. Frankly, there are not enough bucks in the system to de-
liver that in terms of what the private sector can do for people who
have open-ended dollar amounts. That may be the subject of an-
other hearing.
I appreciate all of you coming. Without any further questions,
the Subcommittee stands adjourned.
[Whereupon, at 1:13 p.m., the hearing was adjourned subject to
the call of the Chair.]
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